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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1995 Commission File No. 0-15814
VENTURA COUNTY NATIONAL BANCORP
(Exact Name of Registrant as Specified in its Charter)
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California 77-00038387
(State or Other Jurisdiction of (I.R.S. Employer ID. Number)
Incorporation or Reorganization)
500 Esplanade Drive, Oxnard, California 93030
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (805)981-2600
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Title of each class
-------------------
Common Stock, no par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [_]
There were 9,228,723 shares of Common Stock, no par value, issued and
outstanding as of March 19, 1996. The aggregate market value of such shares
held by nonaffiliates was $28,989,120 as of March 19, 1996.
_______________________________
Documents Incorporated by Reference:
Part II. Items 5,6,7,8 and 9, 1995 Annual Report to Shareholders
Part III. Items 10,11,12, and 13, Proxy Statement for 1996 Meeting
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VENTURA COUNTY NATIONAL BANCORP
FORM 10-K
INDEX
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PAGES
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PART I
ITEM 1. Business 3
ITEM 2. Properties 20
ITEM 3. Legal Proceedings 20
ITEM 4. Submission of Matters to a Vote of Security Holders 21
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters 21
ITEM 6. Selected Financial Data 21
ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 21
ITEM 8. Financial Statements and Supplementary Data 21
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 21
PART III
ITEM 10. Directors and Executive Officers of the Registrant 22
ITEM 11. Executive Compensation 22
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management 22
ITEM 13. Certain Relationships and Related Transactions 22
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 23
Signatures 24
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Part I
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Item 1. Business
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General
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The Company is a registered bank holding company conducting business through its
two subsidiary banks, Ventura County National Bank ("Ventura") and Frontier
Bank, N.A. ("Frontier"). (Ventura and Frontier are sometimes collectively
referred to herein as the "Banks"). At December 31, 1995, the Company had total
consolidated assets of $267.8 million, total consolidated deposits of $236.1
million and total consolidated shareholders' equity of $29.5 million. The
principal executive offices of the Company are located at 500 Esplanade Drive,
Oxnard, California 93030, and its telephone number at that address is (805) 981-
2600.
The Banks are both national banking associations operating in Southern
California. Ventura conducts its banking operations through four branch
offices located in Ventura County, California, approximately 60 miles northwest
of downtown Los Angeles. Ventura's headquarters are located in Oxnard,
California, and its branch offices are located in Oxnard, Ventura, Camarillo and
Westlake Village. Frontier is based in La Palma in northwestern Orange County
and has a branch office in Wilmington in southern Los Angeles County. The Banks
provide commercial banking services to small to medium sized businesses,
professional firms and individuals in their market areas.
Competition
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In an environment of heightened regulatory scrutiny with respect to insured
depository institutions such as Ventura and Frontier and expanded bank-like
services provided by limited service financial institutions and by nonbank
financial service providers, banking and bank related services continue to be an
industry of rapid change and intense competition, thereby creating a highly
competitive environment for the Company. Large moneycenter banks, super-regional
banks, regional banks, multinational banks and mutual funds are the Company's
primary competitors. Higher lending limits, wide-reaching advertising campaigns,
and access to international money markets allows these organizations greater
flexibility in meeting the needs of their customers. The Company competes for
deposits and loans with these organizations as well as with local banks, savings
and loans, savings banks, credit unions, thrift associations, and mortgage and
finance companies. The Company believes its marketing niche to be small and
medium-sized businesses with revenues less than $25 million. In order to compete
with the other financial institutions in its service areas, the Company
principally relies upon local promotional activities, personal relationships
established by officers, directors and employees with its customers, and
specialized services tailored to meet its customers' needs. In those instances
where the Company is unable to accommodate all of a customer's needs because of
regulatory restrictions, the Company will arrange for those services to be
provided by its correspondent banks or other companies with whom it has a
relationship.
Bank of America, N.T. & S.A. and First Interstate Bank of California are the
dominant competitors in both Ventura and Frontier's market areas. First
Interstate Bank of California and Wells Fargo & Company have received regulatory
approval for a merger and the resulting institution will likely be a dominant
competitor in the market areas of both Banks. As of most recent data available,
Ventura had approximately 5% of total bank deposits in Ventura County, while
Frontier's share of total bank deposits in Orange County was 0.17% and Los
Angeles County was 0.8%.
Effect of Governmental Policies and Recent Legislation
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Banking is a business that depends on rate differentials. In general,
the difference between the interest rate paid by the Banks on their deposits and
their other borrowings and the interest rate received by the Banks on loans
extended to their customers and securities held in the Banks' portfolios
comprise the major portion of the Company's earnings. These rates are highly
sensitive to many factors that are beyond the control of the Banks. Accordingly,
the earnings and growth of the Company are subject to the influence of domestic
and foreign economic conditions, including inflation, recession and
unemployment.
The commercial banking business is not only affected by general
economic conditions but is also influenced by the monetary and fiscal policies
of the federal government and the policies of regulatory agencies, particularly
the Board of Governors of the Federal Reserve System (the Federal Reserve
Board"). The Federal Reserve Board implements national monetary policies (with
objectives such as curbing inflation and combating
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recession) by its open-market operations in United States Government securities,
by adjusting the required level of reserves for financial institutions subject
to its reserve requirements and by varying the discount rates applicable to
borrowings by depository institutions. The actions of the Federal Reserve Board
in these areas influence the growth of bank loans, investments and deposits and
also affect interest rates charged on loans and paid on deposits. The nature and
impact of any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, in the California legislature and
before various bank regulatory and other professional agencies. The Financial
Services Modernization Act recently proposed in the House of Representatives
would generally permit banks to expand activities further into the areas of
securities and insurance, and would reduce the regulatory and paperwork burden
that currently affects banks. Additionally, the proposed legislation would force
the conversion of savings and loan holding companies into bank holding
companies, although unitary savings and loan holding companies authorized to
engage in activities as of January 1, 1995 would be exempted. Similar
legislation has also been proposed in the Senate. In addition, legislation was
recently introduced in Congress that would merge the deposit insurance funds
applicable to commercial banks and savings associations and impose a one-time
assessment on savings associations to recapitalize the deposit insurance fund
applicable to savings associations. The likelihood of any major legislative
changes and the impact such changes might have on the Company are impossible to
predict. See "Item 1. Business - Supervision and Regulation."
Supervision and Regulation
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Bank holding companies and banks are extensively regulated under both
federal and state law. Set forth below is a summary description of certain laws
which relate to the regulation of the Company and the Banks. The description
does not purport to be complete and is qualified in its entirety by reference to
the applicable laws and regulations.
The Company
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The Company, as a registered bank holding company, is subject to
regulation under the Bank Holding Company Act of 1956, as amended (the "BHC
Act"). The Company is required to file with the Federal Reserve Board quarterly
and annual reports and such additional information as the Federal Reserve Board
may require pursuant to the BHC Act. The Federal Reserve Board may conduct
examinations of the Company and its subsidiaries.
The Federal Reserve Board may require that the Company terminate an
activity or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of certain bank
holding company debt, including authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances, the Company must
file written notice and obtain approval from the Federal Reserve Board prior to
purchasing or redeeming its equity securities.
Under the BHC Act and regulations adopted by the Federal Reserve
Board, a bank holding company and its nonbanking subsidiaries are prohibited
from requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Further, the
Company is required by the Federal Reserve Board to maintain certain levels of
capital. See "Item 1. Business - Supervision and Regulation - Capital
Standards."
The Company is required to obtain the prior approval of the Federal
Reserve Board for the acquisition of more than 5% of the outstanding shares of
any class of voting securities or substantially all of the assets of any bank or
bank holding company. Prior approval of the Federal Reserve Board is also
required for the merger or consolidation of the Company and another bank holding
company.
The Company is prohibited by the BHC Act, except in certain
statutorily prescribed instances, from acquiring direct or indirect ownership or
control of more than 5% of the outstanding voting shares of any company
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that is not a bank or bank holding company and from engaging directly or
indirectly in activities other than those of banking, managing or controlling
banks or furnishing services to its subsidiaries. However, the Company, subject
to the prior approval of the Federal Reserve Board, may engage in any, or
acquire shares of companies engaged in, activities that are deemed by the
Federal Reserve Board to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. In making any such
determination, the Federal Reserve Board is required to consider whether the
performance of such activities by the Company or an affiliate can reasonably be
expected to produce benefits to the public, such as greater convenience,
increased competition or gains in efficiency, that outweigh possible adverse
effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices. The Federal
Reserve Board is also empowered to differentiate between activities commenced de
--
novo and activities commenced by acquisition, in whole or in part, of a going
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concern.
Under Federal Reserve Board regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Federal Reserve Board's policy that in serving as
a source of strength to its subsidiary banks, a bank holding company should
stand ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve Board
to be an unsafe and unsound banking practice or a violation of the Federal
Reserve Board's regulations or both. This doctrine has become known as the
"source of strength" doctrine. Although the United States Court of Appeals for
the Fifth Circuit found the Federal Reserve Board's source of strength doctrine
invalid in 1990, stating that the Federal Reserve Board had no authority to
assert the doctrine under the BHC Act, the decision, which is not binding on
federal courts outside the Fifth Circuit, was recently reversed by the United
States Supreme Court on procedural grounds. The validity of the source of
strength doctrine is likely to continue to be the subject of litigation until
definitively resolved by the courts or by Congress.
The Company is also a bank holding company within the meaning of
Section 3700 of the California Financial Code. As such, the Company and its
subsidiaries are subject to examination by, and may be required to file reports
with, the California State Banking Department. Regulations have not been adopted
to implement the powers of the California Superintendent of Banks under this
statute.
Finally, the Company is subject to the periodic reporting requirements
of the Securities Exchange Act of 1934, as amended, including but not limited
to, filing annual, quarterly and other current reports with the Securities and
Exchange Commission.
The Banks
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The Banks, as national banking associations, are subject to primary
supervision, examination and regulation by the Office of the Comptroller of the
Currency (the "OCC"). If, as a result of an examination of either Bank, the OCC
should determine that the financial condition, capital resources, asset quality,
earnings prospects, management, liquidity or other aspects of the Bank's
operations are unsatisfactory or that the Bank or its management is violating or
has violated any law or regulation, various remedies are available to the OCC.
Such remedies include the power to enjoin "unsafe or unsound practices," to
require affirmative action to correct any conditions resulting from any
violation or practice, to issue an administrative order that can be judicially
enforced, to direct an increase in capital, to restrict the growth of the Bank,
to assess civil monetary penalties, and to remove officers and directors. The
FDIC has similar enforcement authority, in addition to its authority to
terminate a Bank's deposit insurance in the absence of action by the OCC and
upon a finding that a Bank is in an unsafe or unsound condition, is engaging in
unsafe or unsound activities, or that its conduct poses a risk to the deposit
insurance fund or may prejudice the interest of its depositors.
The deposits of the Banks are insured by the FDIC in the manner and to
the extent provided by law. For this protection, each Bank pays a semi-annual
statutory assessment and is subject to certain of the rules and regulations of
the FDIC. See "Item 1. Business - Supervision and Regulation -- Premiums for
Deposit Insurance." The Banks are also subject to certain regulations of the
Federal Reserve Board and applicable provisions of California law, insofar as
they do not conflict with or are not preempted by federal banking law.
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Various other requirements and restrictions under the laws of the
United States and the State of California affect the operations of the Banks.
Federal and California statutes and regulations relate to many aspects of the
Banks' operations, including reserves against deposits, interest rates payable
on deposits, loans, investments, mergers and acquisitions, borrowings,
dividends, locations of branch offices, capital requirements and disclosure
obligations to depositors and borrowers. Further, the Banks are required to
maintain certain levels of capital. See "Item 1. Business - Supervision and
Regulation - Capital Standards."
The OCC's statement of policy on risk-based capital requires that
banks maintain a ratio of qualifying total capital to risk-weighted assets of
not less than 8.00% (at least 4.00% of which must be in the form of Tier 1
capital). The regulations set forth minimum requirements, and OCC has reserved
the power to require that banks maintain higher capital ratios. Among other
powers, the OCC's regulations provide that capital requirements may be enforced
by the issuance of a directive. The OCC's capital adequacy regulations also
require that banks maintain a minimum leverage ratio of 3.00% Tier 1 capital to
total assets for the most highly rated banks. This ratio is only a minimum.
Institutions experiencing or anticipating significant growth or those with other
than minimum risk profiles are expected to maintain a leverage ratio of at least
100 to 200 basis points above the minimum level. In addition, higher leverage
ratios are required to be considered well-capitalized or adequately capitalized
under the prompt corrective action provisions of the FDIC Improvement Act. For a
more complete description of the OCC's risk-based capital regulations, see
"Supervision and Regulation -- Capital Standards" and "Supervision and
Regulation -- Prompt Corrective Action and Other Enforcement Mechanisms."
Restrictions on Transfers of Funds to the Company by the Banks
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Federal Reserve Board policy prohibits a bank holding company from
declaring or paying a cash dividend which would impose undue pressure on the
capital of subsidiary banks or would be funded only through borrowings or other
arrangements that might adversely affect the holding company's financial
position. The policy further declares that a bank holding company should not
continue its existing rate of cash dividends on its common stock unless its net
income is sufficient to fully fund each dividend and its prospective rate of
earnings retention appears consistent with its capital needs, asset quality and
overall financial condition. Other Federal Reserve Board policies forbid the
payment by bank subsidiaries to their parent companies of management fees which
are unreasonable in amount or exceed the fair market value of the services
rendered (or, if no market exists, actual cost plus a reasonable profit).
The Company is a legal entity separate and distinct from the Banks.
The Company's ability to pay cash dividends is limited by state law. At present,
substantially all of the Company's revenues, including funds available for the
payment of dividends and other operating expenses, are earnings on investment of
cash at the parent Company. In the future, the Company's ability to pay cash
dividends will depend primarily on dividends paid by the Banks.
There are statutory and regulatory limitations on the amount of
dividends which may be paid to the Company by the Banks. The prior approval of
the Comptroller is required if the total of all dividends declared by a national
bank in any calendar year exceeds the bank's net profits (as defined) for that
year combined with its retained net profits (as defined) for the preceding two
years, less any transfers to surplus. Under the prompt corrective action rules
of the Federal Deposit Insurance Corporation Improvement Act, no depository
institution, such as the Banks, may issue a dividend or pay a management fee if
it would cause the institution to become undercapitalized. Additionally, a bank
holding company controlling a significantly undercapitalized institution may not
make any capital distributions without the prior approval of the Federal Reserve
Board. Other supervisory actions may be taken against institutions that are
significantly undercapitalized, as well as undercapitalized institutions that
fail to submit an acceptable capital restoration plan as required by law or that
fail in any material respect to implement an accepted plan. See "Supervision and
Regulation -- Prompt Corrective Action and Other Enforcement Mechanisms."
The OCC has authority to prohibit the Banks from engaging in
activities that, in the OCC's opinion, constitute unsafe or unsound practices in
conducting its business. It is possible, depending upon the financial condition
of the Bank in question and other factors, that the OCC could assert that the
payment of dividends or other payments might, under some circumstances, be such
an unsafe or unsound practice. Further, the OCC and the Federal Reserve Board
have established guidelines with respect to the maintenance of appropriate
levels of capital by banks or bank holding companies under their jurisdiction.
Compliance with the standards set forth in such guidelines and the restrictions
that are or may be imposed under the prompt corrective action provisions of
federal
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law could limit the amount of dividends which the Banks or the Company
may pay. See "Item 1. Business - Supervision and Regulation - Prompt Corrective
Regulatory Action and Other Enforcement Mechanisms" and - "Capital Standards"
for a discussion of these additional restrictions on capital distributions.
Frontier is currently prohibited by the terms of its Consent Order
with the OCC from paying any dividends without the prior consent of the OCC. See
"Supervision and Regulation -- Potential and Existing Enforcement Actions." At
December 31, 1995, Ventura had $ 4.8 million in retained net profits available
for the payment of cash dividends.
The Banks are subject to certain restrictions imposed by federal law
on any extensions of credit to, or the issuance of a guarantee or letter of
credit on behalf of, the Company or other affiliates, the purchase of or
investments in stock or other securities thereof, the taking of such securities
as collateral for loans and the purchase of assets of the Company or other
affiliates. Such restrictions prevent the Company and such other affiliates from
borrowing from the Banks unless the loans are secured by marketable obligations
of designated amounts. Further, such secured loans and investments by the Banks
to or in the Company or to or in any other affiliate is limited to 10% of each
Banks' capital and surplus (as defined by federal regulations) and such secured
loans and investments are limited, in the aggregate, to 20% of each Banks'
capital and surplus (as defined by federal regulations). Additional restrictions
on transactions with affiliates may be imposed on the Banks under the prompt
corrective action provisions of federal law. See "Item 1. Business -Supervision
and Regulation - Prompt Corrective Action and Other Enforcement Mechanisms."
Capital Standards
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The Federal Reserve Board and the OCC have adopted risk-based minimum
capital guidelines intended to provide a measure of capital that reflects the
degree of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent amounts of off balance sheet items are multiplied by one of several
risk adjustment percentages, which range from 0% for assets with low credit
risk, such as certain U.S. Treasury securities, to 100% for assets with
relatively high credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which includes off balance sheet items,
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists primarily
of common stock, retained earnings, noncumulative perpetual preferred stock
(cumulative perpetual preferred stock for bank holding companies) and minority
interests in certain subsidiaries, less most intangible assets. Tier 2 capital
may consist of a limited amount of the allowance for possible loan and lease
losses, cumulative preferred stock, long term preferred stock, eligible term
subordinated debt and certain other instruments with some characteristics of
equity. The inclusion of elements of Tier 2 capital is subject to certain other
requirements and limitations of the federal banking agencies. The federal
banking agencies require a minimum ratio of qualifying total capital to risk-
adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted
assets of 4%.
In addition to the risk-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital to
total assets, referred to as the leverage ratio. For a banking organization
rated in the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3%. For all banking organizations not rated in the highest category, the minimum
leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or
4% to 5%. In addition to these uniform risk-based capital guidelines and
leverage ratios that apply across the industry, the regulators have the
discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
In August 1995, the federal banking agencies adopted final regulations
specifying that the agencies will include, in their evaluations of a bank's
capital adequacy, an assessment of the exposure to declines in the economic
value of the bank's capital due to changes in interest rates. The final
regulations, however, do not include a measurement framework for assessing the
level of a bank's exposure to interest rate risk, which is the subject of a
proposed policy statement issued by the federal banking agencies concurrently
with the final regulations. The proposal would measure interest rate risk in
relation to the effect of a 200 basis point change in market interest rates
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on the economic value of a bank. Banks with high levels of measured exposure or
weak management systems generally will be required to hold additional capital
for interest rate risk. The specific amount of capital that may be needed would
be determined on a case-by-case basis by the examiner and the appropriate
federal banking agency. Because this proposal has only recently been issued, the
Company currently is unable to predict the impact of the proposal on the Banks
if the policy statement is adopted as proposed.
In January 1995, the federal banking agencies issued a final rule
relating to capital standards and the risks arising from the concentration of
credit and nontraditional activities. Institutions which have significant
amounts of their assets concentrated in high risk loans or nontraditional
banking activities and who fail to adequately manage these risks, will be
required to set aside capital in excess of the regulatory minimums. The federal
banking agencies have not imposed any quantitative assessment for determining
when these risks are significant, but have identified these issues as important
factors they will review in assessing an individual bank's capital adequacy.
In December 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and lease losses which, among other
things, establishes certain benchmark ratios of loan loss reserves to classified
assets. The benchmark set forth by such policy statement is the sum of (a)
assets classified loss; (b) 50 percent of assets classified doubtful; (c) 15
percent of assets classified substandard; and (d) estimated credit losses on
other assets over the upcoming 12 months.
Federally supervised banks and savings associations are currently
required to report deferred tax assets in accordance with SFAS No. 109. The
federal banking agencies recently issued final rules, effective April 1, 1995,
which limit the amount of deferred tax assets that are allowable in computing an
institution's regulatory capital. The standard has been in effect on an interim
basis since March 1993. Deferred tax assets that can be realized for taxes paid
in prior carryback years and from future reversals of existing taxable temporary
differences are generally not limited. Deferred tax assets that can only be
realized through future taxable earnings are limited for regulatory capital
purposes to the lesser of (i) the amount that can be realized within one year of
the quarter-end report date, or (ii) 10% of Tier 1 Capital. The amount of any
deferred tax in excess of this limit would be excluded from Tier 1 Capital and
total assets for regulatory capital calculations.
Future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of the Banks to grow and could restrict the amount of
profits, if any, available for the payment of dividends.
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as of December 31, 1995 Ventura Frontier
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MINIMUM
AMOUNT RATIO AMOUNT RATIO REQUIREMENT
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Leverage capital ratio $ 17,709 10.03% $ 8,289 9,80% 4.00%
Tier 1 risk-based capital ratio $ 17,709 15.97% $ 8,289 13.78% 4.00%
Total risk-based capital ratio $ 19,126 17.25% $ 9,051 15.04% 8.00%
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Prompt Corrective Action and Other Enforcement Mechanisms
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Federal law requires each federal banking agency to take prompt
corrective action to resolve the problems of insured depository institutions,
including but not limited to those that fall below one or more prescribed
minimum capital ratios. The law required each federal banking agency to
promulgate regulations defining the following five categories in which an
insured depository institution will be placed, based on the level of its capital
ratios: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of federal law.
An insured depository institution generally will be classified in the following
categories based on capital measures indicated below:
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"Well capitalized" "Adequately capitalized"
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Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4% (3% if the
institution receives the highest
rating from its primary regulator)
"Undercapitalized" "Significantly undercapitalized"
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Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; Tier 1 risk-based capital less than 3%; or
or or Leverage ratio less than 4% (3% Leverage ratio less than 3%.
if the institution receives the highest
rating from its primary regulator)
"Critically undercapitalized"
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Tangible equity to total assets less than 2%.
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An institution that, based upon its capital levels, is classified as
"well capitalized," "adequately capitalized" or "undercapitalized" may be
treated as though it were in the next lower capital category if the appropriate
federal banking agency, after notice and opportunity for hearing, determines
that an unsafe or unsound condition or an unsafe or unsound practice warrants
such treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment.
The law prohibits insured depository institutions from paying
management fees to any controlling persons or, with certain limited exceptions,
making capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot accept
a capital plan unless, among other things, it determines that the plan (i)
specifies the steps the institution will take to become adequately capitalized,
(ii) is based on realistic assumptions and (iii) is likely to succeed in
restoring the depository institution's capital. In addition, each company
controlling an undercapitalized depository institution must guarantee that the
institution will comply with the capital plan until the depository institution
has been adequately capitalized on an average basis during each of four
consecutive calendar quarters and must otherwise provide adequate assurances of
performance. The aggregate liability of such guarantee is limited to the lesser
of (a) an amount equal to 5% of the depository institution's total assets at the
time the institution became undercapitalized or (b) the amount which is
necessary to bring the institution into compliance with all capital standards
applicable to such institution as of the time the institution fails to comply
with its capital restoration plan. Finally, the appropriate federal banking
agency may impose any of the additional restrictions or sanctions that it may
impose on significantly undercapitalized institutions if it determines that such
action will further the purpose of the prompt corrective action provisions.
An insured depository institution that is significantly
undercapitalized, or is undercapitalized and fails to submit, or in a material
respect to implement, an acceptable capital restoration plan, is subject to
additional restrictions and sanctions. These include, among other things: (i) a
forced sale of voting shares to raise capital or, if grounds exist for
appointment of a receiver or conservator, a forced merger; (ii) restrictions on
transactions with affiliates; (iii) further limitations on interest rates paid
on deposits; (iv) further restrictions on growth or required shrinkage; (v)
modification or termination of specified activities; (vi) replacement of
directors or senior executive officers; (vii) prohibitions on the receipt of
deposits from correspondent institutions; (viii) restrictions on capital
distributions by the holding companies of such institutions; (ix) required
divestiture of subsidiaries by the institution; or (x) other restrictions as
determined by the appropriate federal banking agency. Although the appropriate
federal banking agency has discretion to determine which of the foregoing
restrictions or sanctions it will seek to impose, it is required to force a sale
of voting shares or merger, impose restrictions on affiliate transactions and
impose restrictions on rates paid on deposits unless it determines that such
actions would not further the purpose of the prompt corrective action
provisions. In addition, without the prior written approval of the appropriate
federal banking agency, a significantly undercapitalized institution may not pay
any bonus to its senior
9
<PAGE>
executive officers or provide compensation to any of them at a rate that exceeds
such officer's average rate of base compensation during the 12 calendar months
preceding the month in which the institution became undercapitalized.
Further restrictions and sanctions are required to be imposed on
insured depository institutions that are critically undercapitalized. For
example, a critically undercapitalized institution generally would be prohibited
from engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository institution
would not be liable to the institution's shareholders or creditors for
consenting in good faith to the appointment of a receiver or conservator or to
an acquisition or merger as required by the regulator.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with the
agency. Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease and desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal agreements,
the issuance of removal and prohibition orders against institution-affiliated
parties and the enforcement of such actions through injunctions or restraining
orders based upon a judicial determination that the agency would be harmed if
such equitable relief was not granted.
Safety and Soundness Standards
------------------------------
In July 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by FDICIA. The
guidelines set forth operational and managerial standards relating to internal
controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth and compensation, fees
and benefits. Guidelines for asset quality and earnings standards will be
adopted in the future. The guidelines establish the safety and soundness
standards that the agencies will use to identify and address problems at insured
depository institutions before capital becomes impaired. If an institution fails
to comply with a safety and soundness standard, the appropriate federal banking
agency may require the institution to submit a compliance plan. Failure to
submit a compliance plan or to implement an accepted plan may result in
enforcement action.
In December 1992, the federal banking agencies issued final
regulations prescribing uniform guidelines for real estate lending. The
regulations, which became effective on March 19, 1993, require insured
depository institutions to adopt written policies establishing standards,
consistent with such guidelines, for extensions of credit secured by real
estate. The policies must address loan portfolio management, underwriting
standards and loan to value limits that do not exceed the supervisory limits
prescribed by the regulations.
Appraisals for "real estate related financial transactions" must be
conducted by either state certified or state licensed appraisers for
transactions in excess of certain amounts. State certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more. A state
licensed appraiser is required for all other appraisals. However, appraisals
performed in connection with "federally related transactions" must now comply
with the agencies' appraisal standards. Federally related transactions include
the sale, lease, purchase, investment in, or exchange of, real property or
interests in real property, the financing or refinancing of real property, and
the use of real property or interests in real property as security for a loan or
investment, including mortgage-backed securities.
Premiums for Deposit Insurance
------------------------------
Federal law has established several mechanisms to increase funds to
protect deposits insured by the Bank Insurance Fund ("BIF") administered by the
FDIC. The FDIC is authorized to borrow up to $30 billion from the United States
Treasury; up to 90% of the fair market value of assets of institutions acquired
by the FDIC as receiver
10
<PAGE>
from the Federal Financing Bank; and from depository institutions that are
members of the BIF. Any borrowings not repaid by asset sales are to be repaid
through insurance premiums assessed to member institutions. Such premiums must
be sufficient to repay any borrowed funds within 15 years and provide insurance
fund reserves of $1.25 for each $100 of insured deposits. The result of these
provisions is that the assessment rate on deposits of BIF members could increase
in the future. The FDIC also has authority to impose special assessments against
insured deposits.
The FDIC implemented a final risk-based assessment system, as required
by FDICIA, effective January 1, 1994, under which an institution's premium
assessment is based on the probability that the deposit insurance fund will
incur a loss with respect to the institution, the likely amount of any such
loss, and the revenue needs of the deposit insurance fund. As long as BIF's
reserve ratio is less than a specified "designated reserve ratio," 1.25%, the
total amount raised from BIF members by the risk-based assessment system may not
be less than the amount that would be raised if the assessment rate for all BIF
members were .023% of deposits. On August 8, 1995, the FDIC announced that the
designated reserve ratio had been achieved and, accordingly, issued final
regulations adopting an assessment rate schedule for BIF members of 4 to 31
basis points effective on June 1, 1995. On November 14, 1995, the FDIC further
reduced deposit insurance premiums to a range of 0 to 27 basis points effective
for the semi-annual period beginning January 1, 1996.
Under the risk-based assessment system, a BIF member institution such
as the Banks is categorized into one of three capital categories (well
capitalized, adequately capitalized, and undercapitalized) and one of three
categories based on supervisory evaluations by its primary federal regulator (in
the Bank's case, the FDIC). The three supervisory categories are: financially
sound with only a few minor weaknesses (Group A), demonstrates weaknesses that
could result in significant deterioration (Group B), and poses a substantial
probability of loss (Group C). The capital ratios used by the FDIC to define
well-capitalized, adequately capitalized and undercapitalized are the same in
the FDIC's prompt corrective action regulations. The BIF assessment rates are
summarized below; assessment figures are expressed in terms of cents per $100 in
deposits.
Assessment Rates Effective Through the First Half of 1995
<TABLE>
<CAPTION>
Group A Group B Group C
-------------------------------------------
<S> <C> <C> <C>
Well Capitalized...................................... 23 26 29
Adequately Capitalized................................ 26 29 30
Undercapitalized...................................... 29 30 31
Assessment Rates Effective through the Second Half of 1995
<CAPTION>
Group A Group B Group C
-------------------------------------------
<S> <C> <C> <C>
Well Capitalized...................................... 4 7 21
Adequately Capitalized................................ 7 14 28
Undercapitalized...................................... 14 28 31
Assessment Rates Effective January 1, 1996
<CAPTION>
Group A Group B Group C
-------------------------------------------
<S> <C> <C> <C>
Well Capitalized...................................... 0* 3 17
Adequately Capitalized................................ 3 10 24
Undercapitalized...................................... 10 24 27
</TABLE>
*Subject to a statutory minimum assessment of $1,000 per semi-annual period
(which also applies to all other assessment risk classifications).
A number of proposals have recently been introduced in Congress to address
the disparity in bank and thrift deposit insurance premiums. On September 19,
1995, legislation was introduced and referred to the House Banking Committee
that would, among other things: (i) impose a requirement on all SAIF member
institutions to
11
<PAGE>
fully recapitalize the SAIF by paying a one-time special assessment of
approximately 85 basis points on all assessable deposits as of March 31, 1995,
which assessment would be due as of January 1, 1996; (ii) spread the
responsibility for FICO interest payments across all FDIC-insured institutions
on a pro-rata basis, subject to certain exceptions; (iii) require that deposit
insurance premium assessment rates applicable to SAIF member institutions be no
less than deposit insurance premium assessment rates applicable to BIF member
institutions; (iv) provide for a merger of the BIF and the SAIF as of January 1,
1998; (v) require savings associations to convert to state or national bank
charters by January 1, 1998; (vi) require savings associations to divest any
activities not permissible for commercial banks within five years; (vii)
eliminate the bad-debt reserve deduction for savings associations, although
savings associations would not be required to recapture into income their
accumulated bad-debt reserves; (viii) provide for the conversion of savings and
loan holding companies into bank holding companies as of January 1, 1998,
although unitary savings and loan holding companies authorized to engage in
activities as of September 13, 1995 would have such authority grandfathered
(subject to certain limitations); and (ix) abolish the OTS and transfer the OTS'
regulatory authority to the other federal banking agencies. The legislation
would also provide that any savings association that would become
undercapitalized under the prompt corrective action regulations as a result of
the special deposit premium assessment could be exempted from payment of the
assessment, provided that the institution would continue to be subject to the
payment of semiannual assessments under the current rate schedule following the
recapitalization of the SAIF. The legislation was considered and passed by the
House Banking Committee's Subcommittee on Financial Institutions on September
27, 1995, and has not yet been acted on by the full House Banking Committee.
On September 20, 1995, similar legislation was introduced in the
Senate, although the Senate bill does not include a comprehensive approach for
merging the savings association and commercial bank charters. The Senate bill
remains pending before the Senate Banking Committee.
The future of both these bills is linked with that of pending budget
reconciliation legislation since some of the major features of the bills are
included in the Seven-Year Balanced Budget Reconciliation Act. The budget bill,
which was passed by both the House and Senate on November 17, 1995 and vetoed by
the President on December 6, 1995, would: (i) recapitalize the SAIF through a
special assessment of between 70 and 80 basis points on deposits held by
institutions as of March 31, 1995; (ii) provide an exemption to this rule for
weak institutions, and a 20% reduction in the SAIF-assessable deposits of so-
called "Oakar banks;" (iii) expand the assessment base for FICO payments to
include all FDIC-insured institutions; (iv) merge the BIF and SAIF on January 1,
1998, only if no insured depository institution is a savings association on that
date; (v) establish a special reserve for the SAIF on January 1, 1998; and (vi)
prohibit the FDIC from setting semiannual assessments in excess of the amount
needed to maintain the reserve ratio of any fund at the designated reserve
ratio. The bill does not include a provision to merge the charters of savings
associations and commercial banks.
In light of ongoing debate over the content and fate of the budget
bill, the different proposals currently under consideration and the uncertainty
of the Congressional budget and legislative processes in general, management
cannot predict whether any or all of the proposed legislation will be passed, or
in what form. Accordingly, the effect of any such legislation on the Banks
cannot be determined.
Interstate Banking and Branching
--------------------------------
In September 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") became law. Under the Interstate
Act, beginning one year after the date of enactment, a bank holding company that
is adequately capitalized and managed may obtain approval under the BHC Act to
acquire an existing bank located in another state without regard to state law. A
bank holding company would not be permitted to make such an acquisition if, upon
consummation, it would control (a) more than 10% of the total amount of deposits
of insured depository institutions in the United States or (b) 30% or more of
the deposits in the state in which the bank is located. A state may limit the
percentage of total deposits that may be held in that state by any one bank or
bank holding company if application of such limitation does not discriminate
against out-of-state banks. An out-of-state bank holding company may not acquire
a state bank in existence for less than a minimum length of time that may be
prescribed by state law except that a state may not impose more than a five year
existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of
insured banks located in different states and conversion of the branches of the
acquired bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date
12
<PAGE>
in that state or in other states by that state's banks. The same concentration
limits discussed in the preceding paragraph apply. The Interstate Act also
permits a national or state bank to establish branches in a state other than its
home state if permitted by the laws of that state, subject to the same
requirements and conditions as for a merger transaction.
In October 1995, California adopted "opt in" legislation under the
Interstate Act that permits out-of-state banks to acquire California banks that
satisfy a five-year minimum age requirement (subject to exceptions for
supervisory transactions) by means of merger or purchases of assets, although
entry through acquisition of individual branches of California institutions and
de novo branching into California are not permitted. The Interstate Act and the
California branching statute will likely increase competition from out-of-state
banks in the markets in which the Company operates, although it is difficult to
assess the impact that such increased competition may have on the Company's
operations .
Community Reinvestment Act and Fair Lending Developments
--------------------------------------------------------
The Banks are subject to certain fair lending requirements and
reporting obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities. The OCC has rated Ventura
"satisfactory" and Frontier "needs to improve" in complying with their
respective CRA obligations.
In May 1995, the federal banking agencies issued final regulations
which change the manner in which they measure a bank's compliance with its CRA
obligations. The final regulations adopt a performance-based evaluation system
which bases CRA ratings on an institution's actual lending service and
investment performance rather than the extent to which the institution conducts
needs assessments, documents community outreach or complies with other
procedural requirements. In March 1994, the Federal Interagency Task Force on
Fair Lending issued a policy statement on discrimination in lending. The policy
statement describes the three methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment and evidence of disparate impact.
Potential and Existing Enforcement Actions
------------------------------------------
Commercial banking organizations, such as the Banks, and their
institution-affiliated parties, which include the Company, are subject to
potential enforcement actions by the Federal Reserve Board, the FDIC and the OCC
for any unsafe or unsound practices in conducting their businesses or for
violations of any law, rule, regulation or any condition imposed in writing by
the agency or any written agreement with the agency. Enforcement actions may
include the imposition of a conservator or receiver, the issuance of a cease-
and-desist order that can be judicially enforced, the termination of insurance
of deposits (in the case of the Banks), the imposition of civil money penalties,
the issuance of directives to increase capital, the issuance of formal and
informal agreements, the issuance of removal and prohibition orders against
institution-affiliated parties and the imposition of restrictions and sanctions
under the prompt corrective action provisions of the FDIC Improvement Act.
Additionally, a holding company's inability to serve as a source of strength to
its subsidiary banking organizations could serve as an additional basis for a
regulatory action against the holding company.
Following supervisory examinations of Ventura conducted as of June 30,
1992 and Frontier as of July 30, 1992, Ventura entered into a Formal Agreement
with the OCC on March 19, 1993 and Frontier entered into a Consent Order with
the OCC on March 29, 1993. The Consent Order replaced the 1992 MOU previously
entered into between the OCC and Frontier. Based upon an examination of Ventura
completed during the fourth quarter of 1995, the OCC terminated Ventura's Formal
Agreement as of November 30, 1995.
The significant requirements of Frontier's Consent Order include
conducting a program to evaluate and improve board supervision and management,
developing a program designed to improve the lending staff and loan
administration, obtaining current credit information on any loans lacking such
information, reviewing and revising loan policies, establishing an independent
loan review program including periodic reports to the Board, developing and
implementing a program to collect or strengthen criticized assets, reviewing and
maintaining an adequate loan loss reserve, developing a new long range strategic
plan and annual budget, developing a three-year capital plan,
13
<PAGE>
developing and revising liquidity and funds management policy, correcting
violations of law cited by the OCC and obtaining approval from the OCC to
declare or pay a dividend. In addition, the Consent Order requires that Frontier
maintain as of May 31, 1993 and beyond a Tier 1 risk based capital ratio of
9.50% and a leverage capital ratio of 7.00%. At December 31, 1995, Frontier's
Tier 1 risk based capital ratio was 13.78% and its leverage capital ratio was
9.80%. The Consent Order also requires Frontier to retain a new president and to
continue to develop a program of asset diversification.
The Company entered into the MOU with the Federal Reserve Bank of San
Francisco (the "Reserve Bank") acting under delegated authority from the Federal
Reserve Board on March 19, 1994. The significant requirements of the MOU include
submitting a program to improve the financial condition of the Banks, evaluate
and improve board supervision and management, exit the commercial paper market,
comply with Federal Reserve Board policy regarding management or service fees
assessed by the Company and paid by the Banks and implement steps to improve the
effectiveness of the audit and credit review functions. The MOU further
restricts the Company from declaring or paying a dividend, incurring any debt,
adding or replacing a director or senior executive or repurchasing Company stock
without notice to and nondisapproval of the Reserve Bank. The MOU also requires
the Company's Board of Directors to establish a committee to monitor compliance
with the MOU and ensure that quarterly written progress reports detailing the
form and manner of all actions taken to attain compliance with the MOU are
submitted.
Management believes Frontier and the Company are in full compliance
with all of the items required under the Consent Order and MOU, respectively.
14
<PAGE>
Statistical Financial Data
- --------------------------
Investment Portfolio
- --------------------
The following table sets forth cost and market value of investment securities at
the dates indicated.
SECURITIES AVAILABLE-FOR-SALE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
As of December 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
(dollars in thousands) Cost Market Cost Market Cost Market
---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government securities $13,491 $13,575 $22,935 $22,706 $38,597 $38,475
Mortgage-backed securities 21,882 21,648 8,067 7,551 -- --
Federal Reserve Bank and FHLB Stock 1,365 1,365 1,602 1,602 2,300 2,300
- -----------------------------------------------------------------------------------------------------------------
Total securities, available-for-sale $36,738 $36,588 $32,604 $31,859 $40,897 $40,775
==================================================================================================================
SECURITIES HELD-TO-MATURITY
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
As of December 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
(dollars in thousands) Cost Market Cost Market Cost Market
---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government securities $ -- $ -- $ 1,250 $ 1,222 $ -- $ --
Mortgage-backed securities -- -- 17,525 16,741 -- --
- ----------------------------------------------------------------------------------------------------------------
Total securities, held-to-maturity $ -- $ -- $18,775 $17,963 $ -- $ --
=================================================================================================================
</TABLE>
The following table sets forth the maturity distribution of the investment
portfolio at December 31, 1995:
<TABLE>
<CAPTION>
Weighted
Amortized Market Average
Cost Value Yield
- -------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
U.S. Government securities:
Within one year $ 7,493 $ 7,504 5.61%
After one but within five years 5,998 6,071 6.79
After five but within ten years -- -- --
After ten years -- -- --
- -------------------------------------------------------------------------------------------------------------
Total U.S. Government securities $13,491 $13,575 6.14%
=============================================================================================================
Mortgage-backed securities:
Within one year $ -- -- %
After one but within five years 11,574 11,448 5.45
After five but within ten years 10,308 10,200 6.68
After ten years -- -- --
- -------------------------------------------------------------------------------------------------------------
Total Mortgage-backed securities $21,882 $21,648 6.03%
=============================================================================================================
Federal Reserve Bank and FHLB Stock
Within one year $ -- $ -- %
After one but within five years -- -- --
After five but within ten years -- -- --
After ten years 1,365 1,365 7.04
- -------------------------------------------------------------------------------------------------------------
Total FRB and FHLB Stock $ 1,365 1,365 7.04%
=============================================================================================================
Total Investment Securities $36,738 $36,588 6.11%
=============================================================================================================
</TABLE>
15
<PAGE>
Loan Portfolio
- --------------
The following table sets forth the amounts of loans at December 31, according to
the type of loan:
<TABLE>
<CAPTION>
as of December 31, 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial, Financial and Agriculture $142,427(1) $138,193 $197,384 $221,553 $190,076
Real Estate -Construction 1,537 7,734 23,559 31,264 40,860
Real Estate - Mortgage 6,710 11,993 31,202 36,775 37,045
Installment 7,043 9,897 14,961 21,242 30,068
Lease Financing, net of unearned income 48 117 408 867 1,218
- ----------------------------------------------------------------------------------------------
Total Loans $157,765 $167,934 $267,514 $311,701 $299,267
==============================================================================================
</TABLE>
(1) Includes $2.24 million of SBA loans held for sale at December 31, 1995.
Maturity of Loans and Sensitivity of Loans to Changes in Interest Rates
- -----------------------------------------------------------------------
The following table sets forth by category of loan (including fixed and variable
rate loans) the amounts of loans outstanding as of December 31, 1995 which are,
based on remaining scheduled repayment of principal, due in less than one year,
due in one to five years, or due in more than five years. Loan maturities are
based on contractual maturities.
<TABLE>
<CAPTION>
Loans Maturing In
-------------------------------------------
Between Greater
Less Than One-Five Than Five
One Year Years Years Total
--------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Commercial, Financial and Agricultural $39,939 $60,010 $42,478 $ 142,427(1)
Real Estate Construction 961 576 -- 1,537
Real Estate Mortgage. 316 1,568 4,826 6,710
Installment 3,717 3,183 143 7,043
Lease Financing 9 39 -- 48
--------------------------------------------------------
Total Maturities of Loans $44,942 $65,376 $47,447 $ 157,765
========================================================
Loans with fixed interest rates $14,027 $19,255 $ 6,341 $ 39,623
Loans with variable interest rates 30,915 46,121 41,106 118,142
--------------------------------------------------------
Total Repricing of Loans $44,942 $65,376 $47,447 $157,765
========================================================
</TABLE>
(1) Includes $2.24 million of SBA loans held for sale at December 31, 1995.
Nonperforming Assets: Nonperforming loans are those on which the borrower fails
- ---------------------
to perform under the original terms of the obligation. The Company's
nonperforming loans fall within three categories: loans past due 90 days and
still accruing, loans on nonaccrual status and restructured loans. The coverage
ratio, or the ratio of loan loss reserves to nonperforming loans, was 121.62%
and 103.98%, at December 31, 1995, and 1994, respectively. Loans past due 90
days or more and still accruing totaled $101 thousand and $331 thousand at
December 31, 1995, and 1994, respectively. Total nonperforming loans as a
percent of total loans outstanding were 2.81% and 4.73% at December 31, 1995 and
1994, respectively. The decrease in nonaccrual loans was primarily attributable
to the collection of the same and the overall improvement in the credit quality
of the loan portfolio.
Loans are automatically placed on nonaccrual status when principal or interest
payments are past due greater than 90 days. If a loan is an SBA guaranteed loan
and a deferral period has been negotiated or if the loan is in the process of
imminent collection in the normal course of business, the Company may remove the
loan from nonaccrual status and continue to accrue interest. Loans are placed
on nonaccrual status earlier, if there is doubt as to the collectibility of any
amounts due according to the contractual terms of the loan agreement. At
December 31, 1995, loans totaling $4.3 million were on nonaccrual status,
compared to $7.6 million at December 31, 1994.
As of December 31, 1995, the Company had $3.643 million in restructured loans,
of which $3.326 million were performing in accordance with their restructured
terms for a specified period of time, typically at least six months. The
remaining balance is included within loans on nonaccrual status. As of December
31, 1994, the Company had
16
<PAGE>
$1.968 million in restructured loans, of which $1.966 million were performing in
accordance with their restructured terms.
Allocation for Allowance for Loan Losses: Over the five year period ended
- -----------------------------------------
December 31, 1995, the allocation of the allowance for loan losses for
commercial, financial and agricultural loans increased steadily to correspond
with increases in the total volume of loans and the level of loan losses in this
category. The Company's current practice is to make specific allocations to
large loans and unspecified allocations to each loan category based on
management's risk assessment. While management has allocated reserves to various
portfolio categories, the reserve is general in nature and is available for the
loan portfolio The following table sets forth the allocation of the allowance
for loan losses by loan category as of the dates indicated.
<TABLE>
<CAPTION>
as of December 31, 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------
% of % of % of % of % of
Total Total Total Total Total
Balance Loans Balance Loans Balance Loans Balance Loans Balance Loans
- ---------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, Financial
and Agriculture 4,926 3.12% $6,704 3.99% $11,361 4.25% $3,132 1.00% $1,925 0.64%
Real Estate-- Construction 17 0.01 265 0.16 1,916 0.72 242 0.08 254 0.08
Real Estate-- Mortgage 88 0.06 964 0.57 420 0.16 70 0.02 238 0.08
Installment 369 0.23 325 0.19 555 0.21 362 0.12 399 0.13
Lease Financing 1 0.00 3 0.00 61 0.02 48 0.02 29 0.01
------------------------------------------------------------------------------
Total Allocated $5,401 3.42% $8,261 4.92% $14,313 5.35% $3,854 1.24% $2,845 0.95%
==============================================================================
</TABLE>
Potential Problem Loans: The level of nonperforming assets will depend to a
- ------------------------
great extent on the future economic environment. Currently, management of the
Company has identified $9.3 million in potential problem loans at December 31,
1995, in addition to its nonperforming assets, performing restructured loans and
accruing loans 90 days or more past due, as to which it has serious doubts as to
the ability of the borrowers to comply with the present repayment terms and
which may become nonperforming assets, based on known information about possible
credit problems of the borrower.
Foregone Interest Income: If nonaccrual, past due and restructured loans had
- -------------------------
been current and performing according to original terms, gross interest income
for the years ended December 31, 1995, 1994, 1993, 1992 and 1991 would have
increased by $1.3 million, $1.6 million, $2.2 million, $728 thousand and $429
thousand, respectively. The following summarizes foregone interest income for
1995:
<TABLE>
<S> <C>
Interest income at original terms $ 1,669,000
Less: Interest income included in 1995 income (415,000)
---------
Foregone interest income $ 1,254,000
=========
</TABLE>
Deposits
- --------
The Company competes for deposits principally by providing quality customer
service at the Banks' branch offices. In order to stabilize its funding sources,
the Company has taken action to reduce title and escrow demand deposits and
institutional certificates of deposits as a percentage of total deposits. The
Banks are prohibited from purchasing brokered deposits by virtue of their
regulatory agreements with the OCC. See "Supervision and Regulation".
The following table sets forth information regarding the average monthly
deposits and the average rate paid for certain deposit categories for each of
the periods indicated. Average balances are average daily balances.
17
<PAGE>
<TABLE>
<CAPTION>
for the years ended December 31, 1995 1994 1993
- -----------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
- -----------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand Deposits:
Interest-bearing $ 52,895 2.63% $58,114 2.65% $66,167 2.73%
Noninterest-bearing 62,980 -- 75,568 -- 87,383 --
Savings deposits 27,707 2.36% 34,575 2.37% 37,892 2.78%
Time deposits 84,337 5.12% 104,671 3.72% 142,020 3.88%
-----------------------------------------------------------
Total deposits $ 227,919 2.79% $272,928 2.29% $333,462 2.51%
===========================================================
</TABLE>
With respect to the Company's time certificates of deposit of $100 thousand or
more, at December 31, 1995, such deposits had the following schedule of
maturity:
<TABLE>
<CAPTION>
as of December 31, 1995 (dollars in thousands)
-------------------------------------------------
<S> <C>
Three months or less $10,139
Three to six months 8,184
Six to twelve months 8,814
Over twelve months 614
-------
Total $27,751
=======
</TABLE>
Other Borrowings
- ----------------
The following table sets forth certain information with respect to the Company's
commercial paper activities. As of December 31, 1993, the Company had ceased
all commercial paper activity.
<TABLE>
<CAPTION>
as of and for the years ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Maximum month end balance outstanding during the year $ -- $ -- $ 8,616
Average amount outstanding during the year $ -- $ -- $ 6,987
Weighted average interest rate -- -- 2.66%
</TABLE>
The Company utilized credit lines with FHLB during 1994 and 1993.
<TABLE>
<CAPTION>
as of and for the years ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Maximum month end balance outstanding during the year $ -- $ 5,000 $ 8,000
Average amount outstanding during the year $ -- $ 129 $ 7,447
Weighted average interest rate -- 3.55% 3.83%
</TABLE>
Employees
- ---------
At December 31, 1995, the Company had 127 full-time employees. None of the
employees are covered by a collective bargaining agreement. In addition to cash
compensation, the Company compensates its employees with health and accident
insurance, vacation and sick leave, and other normal fringe benefits.
Effects of Environmental Protection Laws
- ----------------------------------------
The Company, to the best of its knowledge, is not aware of any facts relating to
its present loan portfolio that reasonably indicates that compliance by the
Banks with federal, state or local provisions relating to the protection of the
environment will have a material adverse effect on the financial resources,
earnings or competitive position of the Company.
18
<PAGE>
Return on Equity and Assets
- ---------------------------
The following table shows consolidated operating and capital ratios of the
Company:
<TABLE>
<CAPTION>
for the years ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on Assets (1) 1.49% (0.09%) (3.17%)
Return on Equity (2) 15.64% (1.29%) (45.12%)
Dividend Payout Ratio -- -- --
Capital to Assets Ratio (3) 9.48% 6.81% 7.03%
</TABLE>
___________________________
(1) Return on assets: Net income to average total assets.
(2) Return on equity: Net income to average total shareholders' equity.
(3) Capital to assets ratio: Average shareholders' equity to average total
assets.
19
<PAGE>
Item 2: Properties
- -------------------
Since October 1987, Company headquarters have been located at 500 Esplanade
Drive in Oxnard, California. The Company and Ventura's main offices share 31,097
square feet of leased space. The lease which expires in 2002, requires the
Company to pay for any allocated property tax or utility cost increases and to
adjust the monthly rent annually, based on consumer price index changes. The
Company does not have an option to renew this lease. The Company subleased 9,335
square feet of office space in December 1994, from which the Company anticipates
annual cost savings of approximately $134,000.
Ventura leases a 3,100 square foot building at 4730 Telephone Road in Ventura
for its Ventura branch office under a lease expiring November 1996. Ventura does
not have an option to renew this lease. The Company anticipates that it will
attempt to negotiate a renewal of this lease or look for another suitable
location in the third quarter of 1996.
Ventura also leases 6,640 square feet at 502 Las Posas Road, Camarillo and 4,000
square feet at 2655 Townsgate Road in Westlake Village for its Camarillo and
Westlake Village branch offices, respectively. The Camarillo lease expires in
June of 1997, with one ten year and two five year options to renew. The Westlake
Village lease expires in 2005, with one five year option to renew. Ventura pays
its pro rata share of utilities, taxes, common area maintenance and insurance on
all branch locations. In addition to annual adjustments tied to the consumer
price index, Ventura pays $12,000 annually on the Westlake Village property in
lieu of an option to construct an additional 7,000 square foot building.
Ventura's Central Operations is housed in 8,105 square feet at 2125 Knoll Drive
in Ventura. The lease expires on March 31, 2000. The lease provides for annual
adjustments of the rent. The Company has the option of terminating the lease
without penalty during the final year.
Frontier's main office occupies 17,588 square feet at One Centerpointe Drive in
La Palma, California and Frontier has subsequently subleased an additional 8,559
square feet. Frontier leased an additional 1,668 square feet at One Centerpointe
Drive in La Palma under an amendment to the original lease. The lease for the
main office expires in December 2006 and the lease for the additional space
expires in July 1998. Frontier does not have an option to renew these leases.
Frontier purchased a 9,007 square foot building located at 131 West Anaheim
Street in Wilmington for its South Bay branch office during June of 1995.
Frontier purchased the building and lot from the FDIC as a receiver for Maritime
Bank for $265,000 cash. Frontier terminated the month to month lease on its
previous Wilmington branch location and began operating at the current branch
location in September 1995.
The Company believes its present facilities are adequate for its present needs
and anticipated future growth. The Company believes that, if necessary, it could
secure suitable alternative facilities on similar terms without adversely
affecting operations.
Item 3: Legal Proceedings
- --------------------------
There are no material legal proceedings pending other than ordinary routine
litigation incidental to the business of the Company to which the Company or its
subsidiaries is a party or of which any of their property is a subject, except
as described below.
Sharon Tillis, Karen Tillis, et al v. Bankamerica Corporation, et al.
- ---------------------------------------------------------------------
On January 26 1993, plaintiffs filed a class action lawsuit in Los Angeles
County Superior Court, Case No. BC 073448, against Wilshire Computer College
("WCC"), its proprietor Peter Chung, Bank of America, N.T. & S.A. ("Bank of
America") and the California Student Aid Commission ("CSAC"). The Complaint was
subsequently amended to add Ventura, Marine Midland Bank, N.A. ("Marine
Midland") and Educational Funding Services, Inc. ("EFSI"). (Bank of America,
Marine Midland, EFSI and Ventura are collectively referred to as the "Bank
Defendants"). This action arises out of loans made to students of WCC, which
plaintiffs contend were made to induce them to enroll at WCC. VCNB appears to
have made $4.2 million in loans to students at WCC who are sought to be included
in the class. CSAC and the Bank Defendants filed a joint demurrer and motion to
strike portions of the First Amended Complaint, which was sustained on November
17, 1993, eliminating several theories of liability against the Bank Defendants.
20
<PAGE>
Plaintiffs filed a Second Amended Complaint, alleging the following seven causes
of action against the Bank Defendants: (1) violations of Business and
Professions Code (S)17500 regarding allegations of untrue or misleading
statements to prospective students to induce them to enroll at WCC; (2)
violations of the Unruh Act, Civil Code (S)1801 regarding allegations that the
student loan agreements constituted retail installment sales contracts; (3)
violations of Business and Professions Code (S)17200 regarding allegations that
defendants engaged in unfair business practices, including unfair advertising,
acting without permits and making false representations to students and
agencies; (4) fraud, misrepresentation and negligent misrepresentation regarding
allegations that employees and representatives of WCC made misrepresentations to
students to induce them to enroll at the WCC; (5) breach of contract, breach of
the implied covenant of good faith based on the contracts entered into between
plaintiffs and Bank Defendants; (6) rescission and restitution based on the
contracts entered into between plaintiffs and Bank Defendants; and (7) secondary
theories of liability based on causes (1), (3) and (4) regarding allegations of
agency, joint venture, aiding and abetting and close connection.
CSAC and the Bank Defendants filed a joint demurrer to all causes of action in
the Second Amended Complaint which was sustained without leave to amend as to
the Bank Defendants and with leave to amend as to CSAC. Plaintiffs did not amend
their Second Amended Complaint, however, and the court issued an Order and
Judgment of Dismissal of all defendants on October 12, 1994. Notice of Entry of
Judgment in this matter was served on October 25, 1994.
On December 7, 1994, plaintiffs filed a Notice of Appeal with the Court of
Appeal of the State of California and briefs on appeal have been filed. Oral
arguments are scheduled for December 1996. Bank of America reached a settlement
with plaintiffs and plaintiffs and the other Bank Defendants have engaged in
settlement negotiations but, to date, no settlement has been reached. Based upon
the advice of counsel, should the appellate court find reason to reverse the
demurrer, management is currently unable to estimate the likelihood of an
unfavorable outcome or the amount or range of potential loss.
Item 4: Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
There were no matters submitted for vote to the shareholders during the fourth
quarter of 1995.
Part II
- -------
Item 5: Market for Common Stock and Related Shareholder Matters
- ----------------------------------------------------------------
See "Market for Common Stock and Related Shareholder Matters" section of 1995
Annual Report to shareholders which is incorporated by reference herein.
Item 6: Selected Financial Data
- --------------------------------
See "Summary Selected Consolidated Financial And Other Data" section of the 1995
Annual Report to shareholders, which is incorporated by reference herein.
Item 7: Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of the 1995 Annual Report to shareholders which is
incorporated by reference herein.
Item 8: Financial Statements and Supplementary Data
- -----------------------------------------------------
See "Financial Statements" section of the 1995 Annual Report to shareholders
which is incorporated by reference herein.
Item 9: Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosures
- ---------------------
Not applicable.
21
<PAGE>
Part III
- --------
Item 10: Directors and Executive Officers
- ------------------------------------------
Contained in the Proxy Statement for the 1996 Annual Meeting which is to be
filed within 120 days after December 31, 1995, which is incorporated by
reference.
Item 11: Executive Compensation
- --------------------------------
Contained in the Proxy Statement for the 1996 Annual Meeting which is to be
filed within 120 days after December 31, 1995, which is incorporated by
reference.
Item 12: Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
Contained in the Proxy Statement for the 1996 Annual Meeting which is to be
filed within 120 days after December 31, 1995, which is incorporated by
reference.
Item 13: Certain Relationships and Related Transactions
- --------------------------------------------------------
Contained in the Proxy Statement for the 1996 Annual Meeting which is to be
filed within 120 days after December 31, 1995, which is incorporated by
reference.
22
<PAGE>
Part IV
- -------
Item 14: Exhibits, Financial Statement Schedules And Reports On Form 8-K
- ------------------------------------------------------------------------
INDEX
-----
(a.) 1. The following consolidated financial statements of the Company and its
Subsidiaries are included in Item 8 and incorporated by reference to
the 1995 Annual Report to shareholders:
. Consolidated Balance Sheets at December 31, 1995, and December
31, 1994.
. Consolidated Statements of Operations for the years ended
December 31, 1995, 1994, and 1993.
. Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 1995, 1994, and 1993.
. Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994, and 1993.
. Notes to the Consolidated Financial Statements.
. Independent Auditors' Report.
2. Financial Statement Schedules: All schedules to the Consolidated
Financial Statements of the Company required by Article 9 of
Regulations S-X are included in the Notes to the Financial Statements
or are not required under the related instructions, or are
inapplicable.
3. Exhibits:
3.1 -Articles of Incorporation, as amended (1)
3.2 -Bylaws, as amended (1)
10.1 -1991 Incentive Stock Option Plan (2) +
10.2 -Incentive Stock Option Plan (3) +
10.3 -Incentive Stock Option Plan of Conejo (former subsidiary of
Ventura) (4) +
10.4 -Non-Qualified Stock Option Plan of Conejo (former
subsidiary of Ventura) (5) +
10.5 -401(k)/Employee Stock Ownership Plan (6) +
10.6 -Salary Continuation Agreement for Cupp (1) +
10.7 -Employment Agreement for Kellogg (7) +
10.8 -Employment Agreement for Raggio (7) +
10.9 -Employment Agreement for Lagomarsino(7) +
10.10 -Management Incentive Compensation Program +
11 -Computation of per share income (loss)
13 -Annual Report to Shareholders (information not incorporated
by reference herein is excluded)
22 -The following companies are wholly owned subsidiaries of
Ventura County National Bancorp:
Ventura County National Bank, a National Association
Ventura Management Services Company Inc.
Frontier Bank, N.A., a National Association
23.1 -Consent of Deloitte & Touche LLP
27 -Financial Data Schedule
____________________________________________
(+) Management contract or compensatory plan or arrangement.
(1) This exhibit is filed as an exhibit to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1993 and incorporated
herein by reference.
(2) This exhibit is filed as an Exhibit to the Registrant's S-8
Registration Statement File No. 33-9207 and incorporated herein by
reference.
(3) This exhibit is filed as Exhibit 10.6 to Registrant's Statement File
No. 33-9207 and incorporated herein by reference.
(4) This exhibit is filed as Exhibit 10.1 to Registrant's Registration
Statement File No. 33-28780 and incorporated herein by reference.
(5) This exhibit is filed as Exhibit 10.2 to Registrant's Registration
Statement File No. 33-28780 and incorporated herein by reference.
(6) This exhibit is filed as Exhibit 10.5 to Registrant's Registration
Statement File No. 33-28780 and incorporated herein by reference.
(7) This exhibit is filed as an Exhibit to the Registrant's S-2
Registration Statement File No. 33-88388 and incorporated herein by
reference.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the last quarter of 1995.
(c) Exhibits
--------
See Index to Exhibits included in this Annual Report on Form 10-K.
23
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: March 7, 1996 VENTURA COUNTY NATIONAL BANCORP
-------------------------------
(Registrant)
By: /s/ RICHARD S. CUPP
-------------------------------------
RICHARD S. CUPP
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the date
indicated above.
SIGNATURE TITLE SIGNATURE TITLE
- --------- ----- --------- -----
/s/ JAMES B. HUSSEY /s/ MICHAEL ANTIN
- --------------------------------------- --------------------------------
James B. Hussey, Chairman of the Board Michael Antin, Director
/s/ RALPH R. BENNETT /s/ RICHARD S. CUPP
- --------------------------------------- --------------------------------
Ralph R. Bennett, Director Richard S. Cupp, Director
Chief Executive Officer
(Principal Executive Officer)
/s/ JAMES M. DAVIS /s/ BART M. HACKLEY
- --------------------------------------- --------------------------------
James M. Davis, Director Bart M. Hackley, Director
/s/ W. E. HARTMAN /s/ RICHARD A. LAGOMARSINO
- --------------------------------------- --------------------------------
W. E. Hartman, Director Richard A. Lagomarsino, Director
/s/ ZELLA A. RUSHING /s/ RAYMOND E. SWIFT
- --------------------------------------- --------------------------------
Zella A. Rushing Director Raymond E. Swift, Director
/s/ SIMONE LAGOMARSINO
- ---------------------------------------
Simone Lagomarsino
Senior Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
24
<PAGE>
EXHIBIT 10.10
VENTURA COUNTY NATIONAL BANCORP
(Ventura County National Bank and
Frontier Bank, N.A.)
MANAGEMENT INCENTIVE
COMPENSATION PROGRAM
- Confidential -
March 1995
THE MARGADY GROUP, INC.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
I. ANNUAL INCENTIVE PROGRAM OBJECTIVES AND OVERVIEW ....................... 1
A. PROGRAM DESIGN OBJECTIVES .................................... 1
B. PROGRAM OVERVIEW ............................................. 2
II. ANNUAL INCENTIVE PLAN DESIGN ........................................... 4
A. BASIS FOR INCENTIVES ......................................... 4
B. PROFIT OBJECTIVE PERFORMANCE (POP) MEASURE ................... 5
C. RELATIVE RETURN ON ASSETS (ROAR) MEASURE ..................... 6
D. INDIVIDUAL PERFORMANCE MEASURE ............................... 9
E. ANNUAL INCENTIVES AND PERFORMANCE ........................... 12
III. ANNUAL INCENTIVE PROGRAM ADMINISTRATION ............................... 16
A. OVERALL RESPONSIBILITY ...................................... 16
B. GUIDELINES TO PLAN PARTICIPANT SELECTION .................... 16
C. GUIDELINES TO THE TIMING OF AWARDS AND PAYMENT .............. 17
D. GUIDELINES TO DETERMINING THE SIZE OF AWARDS ................ 17
E. FORM AND TIME OF PAYMENT .................................... 17
F. PLAN SAFEGUARDS AND LIMITATIONS ............................. 18
G. SELECTION OF THE PEER GROUPS ................................ 21
APPENDIX A: POP AND ROAR FACTOR WEIGHTS, 1995-98 PERFORMANCE ............... 22
APPENDIX B: SAMPLE PEER COMPARISON GROUPS .................................. 24
APPENDIX C: CALCULATION OF ROAR MEASURE .................................... 27
</TABLE>
<PAGE>
I. ANNUAL INCENTIVE PROGRAM OBJECTIVES AND OVERVIEW
------------------------------------------------
A. PROGRAM DESIGN OBJECTIVES
-------------------------
. Limit to groups of participants at Ventura County National Bancorp (VCNB),
Ventura National Bank (Ventura), and Frontier Bank (Frontier) who can
significantly contribute to profits, revenues, cost containment
.. Group I: CEO/President-VCNB, President-Frontier
.. Group II: Executive/Senior Vice Presidents reporting to the
Presidents
.. Group III: Selected managers reporting to Group II executives and
other selected managers
. Reward achievement of annual profit and other objectives as indicated in
------
the strategic plan
. Reflect participants' varying impact on profits and other results
.. Incorporated individual performance evaluation
.. Link to participants' accomplishment of specific individual objectives
. Plan elements flexible, will be adjusted over time
1
<PAGE>
I. ANNUAL INCENTIVE PROGRAM OBJECTIVES AND OVERVIEW, Cont'd
------------------------------------------------
B. PROGRAM OVERVIEW
----------------
. Incentives will be based on a combination of:
.. VCNB, Ventura and Frontier results
.. Peer bank comparisons
.. Individual performance
. Incentives will be determined based on profitability after accruing
(deducting) incentive costs.
. Depending upon the unit to which the participant reports, the annual
incentive plan is based on:
.. Annual VCNB or Ventura or Frontier Bank performance compared with plan
.. Profitability relative to VCNB or Ventura or Frontier peers
.. Individual performance assessments
2
<PAGE>
I. ANNUAL INCENTIVE PROGRAM OBJECTIVES AND OVERVIEW, Cont'd
------------------------------------------------
B. PROGRAM OVERVIEW
----------------
. Each position has a target incentive opportunity
------
.. Target set as a percentage of participant's base salary
.. Differing percentages reflecting participants' potential to affect his
or her unit's performance
ANNUAL INCENTIVE OPPORTUNITY
----------------------------
(PERCENT OF BASE SALARY)
<TABLE>
<CAPTION>
MINIMUM TARGET MAXIMUM
GROUP PERFORMANCE PERFORMANCE PERFORMANCE
- ----- ----------- ----------- -----------
<S> <C> <C> <C>
I 0.0% 20-25% 36-46%
II 0.0% 15-20% 27-36%
III 0.0% 10-15% 18-27%
</TABLE>
. Incentives earned will depend on performance results
. Target incentives may increase over time
.. As VCNB and Banks grow in assets and profits
.. Any future increase in incentive opportunity must be accompanied by
reduced rate of base salary increases
3
<PAGE>
II. ANNUAL INCENTIVE PLAN DESIGN
----------------------------
A. BASIS FOR INCENTIVES
--------------------
. Three performance measures determine incentives:
.. $ profit objective performance (POP)
.. Return on assets relative to peers (ROAR)
.. Individual performance assessment
. Two financial performance measures are weighted:
.. Weights to change over time, 1995 proportions shown below:
- Profit Objective Performance (POP) 70%
- Relative Return on Assets (ROAR) 30%
.. Appendix A provides schedule of POP/ROAR proportions
. Earned annual incentive award:
INCENTIVE = (ROAR MEASURE + POP MEASURE) x INDIVIDUAL PERFORMANCE MEASURE
. Individual performance assessment increases or decreases the Incentive
amount that can be earned by each participant
. For Groups I and II:
.. Primary emphasis on achievement of ROAR and POP
.. But, individual performance can increase award by 40% or reduce it to
0%
. For Group III:
.. Primary emphasis on personal goal achievement
.. ROAR and POP factors may increase award by 20% or decrease it by 40%
4
<PAGE>
II. ANNUAL INCENTIVE PLAN DESIGN, CONT'D
----------------------------
B. PROFIT OBJECTIVE PERFORMANCE (POP) MEASURE
------------------------------------------
. Based on achieving a "stretching" pre-tax income target
.. Agreed upon each year
.. Adopted by Board of Directors
.. For each unit (VCNB, Ventura and Frontier)
. Incentive awards begin to fund close to target
.. Awards increase substantially as income approaches "stretching" target
. Awards level off after profit target is reached, rising slowly up to
maximum amount over target
. Objective is to manage toward accomplishment of plan
.. Strong motivation to reach target
.. Limited benefits from windfalls
. "POP" performance levels for incentives:
<TABLE>
<CAPTION>
THRESHOLD TARGET MAXIMUM
PERFORMANCE PERFORMANCE PERFORMANCE
----------- ----------- -----------
<S> <C> <C>
80% OF 100% OF 120%
PROFIT PLAN PROFIT PLAN PROFIT PLAN
</TABLE>
. In 1995, comprises 70% of target incentive for Groups I and II
. Comprises 70% of the adjustment factor applied to Group III participants'
individual performance measure
.. Appendix A presents a four year schedule of POP influence on
incentives.
5
<PAGE>
II. ANNUAL INCENTIVE PLAN DESIGN, CONT'D
----------------------------
C. RELATIVE RETURN ON ASSETS (ROAR) MEASURE
----------------------------------------
. Factor based on the Holding Company or Bank profitability (ROA) vs. group
of comparable peers, depending on the plan participant's unit.
.. The profitability measure, return on average assets (ROA), will be
measured net of extraordinary gains or losses as determined by GAAP,
additionally, the inclusion or exclusion of other extraordinary gains
and losses will be subject to Board approval.
. Three different peer groups:
.. VCNB: 24 California bank holding companies closest in size to VCNB
.. Ventura County National Bank: 24 banks closest in size in Ventura,
Santa Barbara and Los Angeles Counties
-- Will include Ventura and Santa Barbara banks with +-50% of the
assets of the Ventura County National Bank
.. Frontier Bank: 24 banks closest in size in Los Angeles and Orange
Counties
. Peer institutions must have equity capital to assets of 4% or greater
. In 1995, target relative return on assets performance for each unit set at
the 60th percentile level relative to the appropriate peer group
. Performance above or below relative ROA target results in upward or
downward adjustment of incentive awards
.. Threshold performance - at the 45th percentile of the peer group
.. Maximum incentive - at the 75th percentile of peers
6
<PAGE>
II. ANNUAL INCENTIVE PLAN DESIGN, CONT'D
----------------------------
C. RELATIVE RETURN ON ASSETS (ROAR) MEASURE
----------------------------------------
. "ROAR" performance levels for incentives:
<TABLE>
<CAPTION>
THRESHOLD TARGET MAXIMUM
PERFORMANCE PERFORMANCE PERFORMANCE
----------- ----------- -----------
<S> <C> <C>
45TH PERCENTILE 60TH PERCENTILE 75TH PERCENTILE
</TABLE>
. ROAR performance levels for incentives in 1996 and beyond will be increased
according the schedule in Appendix A
. Comprises 30% of target incentive for Group I and II
. For 1995, comprises 30% of the adjustment factor applied to Group III
participants' individual performance measure
. Appendix A presents a four year schedule of ROAR influence on incentives
. For Groups I and II, after Holding Company or Bank performance results (POP
and ROAR) are determined, individual performance is evaluated
. For Group III, this is the primary factor
. Should be based on specific objectives agreed to by participant and his/her
manager each year
. Provides flexibility in assessing contribution by participant
7
<PAGE>
II. ANNUAL INCENTIVE PLAN DESIGN, CONT'D
----------------------------
C. RELATIVE RETURN ON ASSETS (ROAR) MEASURE
----------------------------------------
. For Groups I and II, incentives earned based on financial performance (sum
of ROAR + POP) and are adjusted up or down based on individual performance
evaluations
.. Achieving individual targets results in payout of earned award
.. Exceeding individual targets can increase award by 40%
.. Individual performance below minimum acceptable level reduces award to
zero
. For Group III, emphasis is on personal goal achievement
.. POP and ROAR performance factors may increase award
By 20% or decrease it by 40%
. Calculation of the ROAR measure may be found in Appendix C
8
<PAGE>
II. ANNUAL INCENTIVE PLAN DESIGN, CONT'D
----------------------------
D. INDIVIDUAL PERFORMANCE MEASURE
------------------------------
. For Groups I and II, after VCNB, Ventura or Frontier performance results
(POP and ROAR) are determined, individual performance is evaluated
. For Group III, this is the primary factor
. Should be based on specific objectives agreed to by participant and his/her
manager each year
. Provides flexibility in assessing contribution by participant
. For Groups I and II, incentives earned based on unit performance -- VCNB or
Ventura or Frontier -- (sum of ROAR + POP) and are adjusted up or down,
based on individual performance evaluations
.. Achieving individual targets results in payout of earned award
.. Exceeding individual targets can increase award by 40%
.. Individual performance below minimum acceptable level reduces award to
zero
. For Group III, emphasis in on personal goal achievement
.. POP and ROAR performance factors may increase award by 20% or decrease
it by 40%
9
<PAGE>
II. ANNUAL INCENTIVE PLAN DESIGN, Cont'd
----------------------------
D. INDIVIDUAL PERFORMANCE MEASURE
------------------------------
INDIVIDUAL PERFORMANCE RATINGS
RATING GUIDE
- ------------
A = OUTSTANDING: Performance that SIGNIFICANTLY EXCEEDS EXPECTATIONS. As an
-----------------------------------
overall evaluation rating, this level is for individuals who
significantly exceed most of their objectives. Overall
objectives achievement is significantly above most others in
similar positions.
B = COMMENDABLE: Performance that is FULLY ACCEPTABLE and MEETS ALL
(MET OBJECTIVES) ---------------- ---------
EXPECTATIONS. As an overall evaluation rating, this level is
-------------
for individuals who generally achieved their objectives.
C = MODERATE: Performance that is SOMEWHAT BELOW EXPECTATIONS and falls
---------------------------
somewhat short (75-80% achievement or more) of objectives
being evaluated. As an overall evaluation rating, this is
for individuals who, while achieving some objectives, fall
short of other objectives.
D = MARGINAL: Performance that is CLEARLY BELOW EXPECTATIONS and falls
--------------------------
significantly short (less than 70-75% achievement) of
objectives being evaluated. As an overall evaluation rating,
performance is clearly below expected results, with few
important objectives achieved.
RATING VARIANCE
- ---------------
When evaluating individual objectives, "+" or "-" is used to indicate an
exceedingly difficult objective or an easy objective. As part of an overall
evaluation rating, the "+" or "-" indicates overall performance between the four
primary rating levels.
10
<PAGE>
II. ANNUAL INCENTIVE PLAN DESIGN, CONT'D
----------------------------
D. INDIVIDUAL PERFORMANCE MEASURE
------------------------------
. Individual performance evaluation and corresponding incentive adjustment
factor:
ANNUAL INCENTIVE PLAN
---------------------
INDIVIDUAL PERFORMANCE RATING AND MEASURE
-----------------------------------------
<TABLE>
<CAPTION>
INDIVIDUAL
PERFORMANCE
FACTOR
APPLIED TO
PERSONAL INCENTIVE
PERFORMANCE LEVEL RATING OPPORTUNITY
----------------- ------ -----------
<S> <C> <C>
OUTSTANDING A 1.4
(MAXIMUM)
A- 1.3
B+ 1.2
COMMENDABLE B* 1.0*
(MET OBJECTIVES)
B- 0.8
C+ 0.6
MODERATE ACHIEVEMENT C 0.5
C- 0.3
MARGINAL OR BELOW D+, D 0.0
* TARGET INCENTIVE LEVEL
</TABLE>
11
<PAGE>
E. ANNUAL INCENTIVES AND PERFORMANCE
---------------------------------
. Below threshold performance, the board of directors may establish
discretionary awards for plan participants
. For performance between threshold and target or target and maximum levels,
use straight-line interpolation to determine incentive amounts
. 1995 annual incentive opportunity for Group I participant:
<TABLE>
<CAPTION>
GROUP I
INCENTIVE OPPORTUNITY AS % BASE SALARY*
AT VARIOUS PERFORMANCE LEVELS
-----------------------------------
PERFORMANCE
MEASURE THRESHOLD TARGET MAXIMUM
AND WEIGHT PERFORMANCE PERFORMANCE PERFORMANCE
- ----------- ----------- ----------- -----------
<S> <C> <C> <C>
PROFIT OBJECTIVE 80% OF PLAN 100% OF PLAN 120% OF PLAN
PERFORMANCE (70%) (0.0%) (17.5%) (22.75%)
RELATIVE RETURN 45TH PERCENTILE 60TH PERCENTILE 75TH PERCENTILE
ON ASSETS (30%) (0.0%) (7.5%) (9.75%)
----------- ----------- -----------
TOTAL INCENTIVE OPPORTUNITY 0.0% 25.0% 32.50%
</TABLE>
* Individual Award Target Incentives may range between 20-25%
. Individual performance evaluations will increase or decrease incentive
amount. Amount of incentive will be:
.. Threshold performance: Award is $0
.. Target performance: 1.0 x incentive opportunity
.. Maximum performance: 1.4 x incentive opportunity
12
<PAGE>
E. ANNUAL INCENTIVES AND PERFORMANCE, CONT'D
----------------------------------
. Annual incentive opportunity for Group II participants:
<TABLE>
<CAPTION>
GROUP II
INCENTIVE OPPORTUNITY AS % BASE SALARY*
AT VARIOUS PERFORMANCE LEVELS
-----------------------------------
PERFORMANCE
MEASURE THRESHOLD TARGET MAXIMUM
AND WEIGHT PERFORMANCE PERFORMANCE PERFORMANCE
- ----------- ----------- ----------- -----------
<S> <C> <C> <C>
PROFIT OBJECTIVE 80% OF PLAN 100% OF PLAN 120% OF PLAN
PERFORMANCE (75%) (0.0%) (14.0%) (18.2%)
RELATIVE RETURN 45TH PERCENTILE 60TH PERCENTILE 75TH PERCENTILE
ON ASSETS (25%) (0.0%) (6.0%) (7.8%)
----------- ----------- -----------
TOTAL INCENTIVE OPPORTUNITY 0.0% 20.0% 26.0%
</TABLE>
* Individual Award Target Incentives may range between 15-20%
. Individual performance evaluations will increase or decrease incentive
amount. Amount of incentive will be:
.. Threshold performance: Award is $0
.. Target performance: 1.0 x incentive opportunity
.. Maximum performance: 1.4 x incentive opportunity
13
<PAGE>
E. ANNUAL INCENTIVES AND PERFORMANCE, CONT'D
----------------------------------
. Annual incentive opportunity for Group III participants (as a percent of
base salary)*:
.. Below minimum performance for personal goals = 0%
.. At target performance for personal goals = 15.0%**
.. At maximum performance for personal goals = 21.0%
* Based on weighted average of personal goal achievement ratings, as
determined by the Individual Performance Measure
** Target incentive may range from 10% to 15% of base salary, depending
on position; to be determined by CEO/President of VCNB
. Financial performance measures for each participant's unit (for 1995)
increase or decrease Group III participants' awards by the following
amounts:
<TABLE>
<CAPTION>
GROUP III
INCENTIVE OPPORTUNITY ADJUSTMENTS
AT VARIOUS PERFORMANCE LEVELS
-----------------------------------
PERFORMANCE
MEASURE THRESHOLD TARGET MAXIMUM
AND WEIGHT PERFORMANCE PERFORMANCE PERFORMANCE
- ----------- ----------- ----------- -----------
<S> <C> <C> <C>
PROFIT OBJECTIVE 80% OF PLAN 100% OF PLAN 120% OF PLAN
PERFORMANCE (70%) OR LESS (0.7) (0.84)
(0.42)
RELATIVE RETURN 45TH PERCENTILE 60TH PERCENTILE 75TH PERCENTILE
ON ASSETS (30%) 0R LESS (0.3) (0.36)
(0.18)
----------- ----------- -----------
INCENTIVE OPPORTUNITY NEVER LESS 1.0 1.2
MODIFIER THAN 0.60
</TABLE>
. At their minimum level of performance, POP and ROAR measures will reduce
incentive by 40%
. At their maximum level of performance, POP and ROAR measures will increase
incentive by 20%
14
<PAGE>
E. ANNUAL INCENTIVES AND PERFORMANCE, CONT'D
----------------------------------
. The table below presents an example of payouts under the annual plan, at
various performance levels.
EXAMPLE OF 1995 ANNUAL INCENTIVE AWARD CALCULATIONS
<TABLE>
<CAPTION>
==================================================================================================
INCENTIVE AMOUNTS'
-----------------------------------------
Individual ROAR Factor ROAR Factor
Perfor- 60th Percentile 75th Percentile
Partici- Target mance -----------------------------------------
Group pant Salary Incentive Factor 100% 120% 100% 120%
POP POP POP P0P
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
I A $125,000 25% 1.0 $31,250 $37,813 $34,063 $40,625
- --------------------------------------------------------------------------------------------------
II B 90,000 20% 1.2 21,600 26,136 23,544 28,080
- --------------------------------------------------------------------------------------------------
III C 60,000 15% 0.8 7,200 8,208 7,632 8,640
==================================================================================================
</TABLE>
1. Subject to Plan Safeguards
15
<PAGE>
III. ANNUAL INCENTIVE PROGRAM ADMINISTRATION
---------------------------------------
A. OVERALL RESPONSIBILITY
----------------------
. The incentive program has been designed to provide flexibility in its
implementation:
.. It is to be administered by the Compensation Committee of the Board of
Directors of VCNB, excluding program participants and excluding those
eligible to participate in the plans
.. The Compensation Committee, acting on the recommendations of the VCNB
President, will select annual plan participants, determine when awards
should be made to participants and ratify the size of each
participant's target award.
B. GUIDELINES TO PLAN PARTICIPANT SELECTION
----------------------------------------
. Participation in the annual plan is to be determined by the Compensation
Committee, acting upon the recommendations of the President of VCNB.
Participation in 1995 will be limited to:
.. Group I: Comprising the CEO/President of VCNB/Ventura and the
President of Frontier
(List)
.. Group II: Comprising Executive and Senior Vice President reporting to
the President of VCNB/Ventura or the President of Frontier
(List)
.. Group III: Comprising selected managers as recommended by the
President of VCNB
(List)
<PAGE>
III. INCENTIVE PROGRAM ADMINISTRATION, CONT'D
--------------------------------
C. GUIDELINES TO THE TIMING OF AWARDS AND PAYMENT
----------------------------------------------
. Each annual plan participant will receive payment in cash for the amount of
his/her earned incentive as soon as practical after fiscal year-end.
.. With the consent of the compensation committee, a participant may, in
advance of the annual plan year, elect to defer receipt of payment of
the incentive award beyond the date when such payment would normally
be made. If a participant elects to defer receipt of payment, such
deferral will be stipulated using a written agreement between the
committee and the participant. Any such election will be irrevocable
for that award payment.
D. GUIDELINES TO DETERMINING THE SIZE OF AWARDS
--------------------------------------------
. The program provides recommended annual target incentive ranges for
participating positions.
. The Compensation Committee, with the recommendation and concurrence of the
President and CEO of VCNB, has the right to determine the size of the
target of an annual award.
E. FORM AND TIME OF PAYMENT
------------------------
. Unless the participant has elected to defer an award, each participant in
the annual plan will receive the awards in cash in the amount determined by
plan criteria. Payment will be made as soon as practical after the plan
year-end.
17
<PAGE>
III. INCENTIVE PROGRAM ADMINISTRATION, CONT'D
---------------------------------
F. PLAN SAFEGUARDS AND LIMITATIONS
-------------------------------
. The plan has the following controls to prevent inappropriate payments:
.. The Board of Directors may, without notice, amend or terminate the
annual plan, or from time-to-time, suspend it.
. No annual incentive compensation other than discretionary awards may
be paid to VCNB participants when the Holding Company's return on assets
falls below 0.3%. Similarly, should either Ventura or Frontier's ROA
fall below 0.3%, no annual incentive compensation, other than
discretionary awards, may be paid to respective Bank incentive plan
participants.
. When either VCNB's, Ventura's or Frontier's performance eliminates
annual incentives, the Compensation Committee, with the approval of the
board, may award discretionary bonuses to selected participants upon
recommendations from the President/CEO of VCNB.
. In the event that participants are only eligible for discretionary awards,
these awards will be limited to those participants who have achieved an
individual performance rating of B + or better.
. In no circumstances will individual discretionary awards be greater than:
.. 20% of a Group I participant's base salary
.. 15% of Group II participant's base salary
.. 10% of Group III participant's base salary
18
<PAGE>
III. INCENTIVE PROGRAM ADMINISTRATION, CONT'D
---------------------------------
F. PLAN SAFEGUARDS AND LIMITATIONS
-------------------------------
. The maximum total amount of annual plan incentive compensation that may be
paid to participants each year is limited:
.. GROUPS I AND II: To the aggregate of participant's incentive
opportunity times 1.2 before applying the individual performance
measure. If the application of the individual performance measure
to all participants results in aggregated awards which exceed this
amount, the incentive payouts are pro rated downward for each
participant to equal the sum of the ROAR measure and the POP
measure incentives for all participants times 1.2.
.. GROUP III: To the aggregate of participants' incentive opportunity
times 1.03 before applying the POP and ROAR adjustment factors. If the
application of the POP and ROAR factors to all participants results in
aggregated awards which exceed this amount, the incentive payouts are
pro rated downward for each participant so that their sum equals the
individual performance awards times 1.03.
. Regardless of Holding Company or individual Bank performance, payments
under the annual plan are forfeited in any year if at year-end the
Holding Company falls below regulatory capital requirements.
19
<PAGE>
III. INCENTIVE PROGRAM ADMINISTRATION, Contd
--------------------------------
F. PLAN SAFEGUARDS AND LIMITATIONS
-------------------------------
. The maximum total amount of annual incentive compensation paid out under
the annual plan shall not exceed in any circumstances 14% of after net
income for that year, after the accrual of annual incentive compensation
expense.
.. Should the annual incentives exceed 14% of net after tax income, then
all annual awards will be pro-rated downward until the total
incentives for all Groups were equal to no more than 14% of after
tax net income.
. In the event that a participant's full-time employment with VCNB or its
subsidiary Banks should terminate for any reason other than death, total
and permanent disability or retirement (including early retirement), that
participant will forfeit any annual incentive plan compensation for that
fiscal year.
.. A participant's earned but deferred awards (if any) will become
payable upon termination of employment of the plan participant
due to death, permanent and total disability or retirement
(including early retirement).
. Notwithstanding any other provisions of this plan, the Board of Directors,
acting upon the recommendation of the Compensation Committee, will retain
the right to make payments to participants whose employment with VCNB or
its subsidiary Banks terminates for reasons other than specified, if it is
deemed in the best interests of VCNB to do so.
.. A leave of absence, unless otherwise determined by the compensation
committee shall not constitute a cessation of employment.
20
<PAGE>
III. INCENTIVE PROGRAM ADMINISTRATION, CONT'D
---------------------------------
G. SELECTION OF THE PEER GROUPS
----------------------------
. The peer comparison group used to determine the relative return on assets
(ROAR) performance measure will depend upon the unit in which the
participant is employed.
. VCNB: 24 California bank holding companies closest in size to VCNB.
. Ventura County National Bank: 24 banks closest in size in Ventura, Santa
Barbara and Los Angeles Counties.
.. Will include those Ventura and Santa Barbara banks with assets plus
or minus 50% of the size of Ventura County National Bank.
. Frontier Bank: 24 banks closest in size of Los Angeles and Orange Counties.
. Each fiscal year, the peer comparison groups will be re-established and
those institutions failing the above size criteria will be eliminated.
.. Peer group selection for each plan year will be based on data
available from Call Reports or private vendors for the September
quarter of the prior year.
. The relative return on assets performance measure for each fiscal year for
each unit will be determined using four quarters of cumulative data ending
in the prior calendar year's third quarter.
.. Cumulative four quarter performance data (ending with the September
quarter) for each appropriate VCNB unit will be measured against
comparable data for the corresponding appropriate peer group each
year.
21
<PAGE>
APPENDIX A
----------
POP AND ROAR FACTOR WEIGHTS
---------------------------
AND REQUIRED PERFORMANCE LEVELS 1995-1998
-----------------------------------------
POP AND ROAR FACTOR WEIGHTS
- ---------------------------
The Annual Management Incentive Plan takes into consideration recent historical
performance of VCNB, Ventura and Frontier compared to their respective peer
groups. Initially, the Plan recognizes that the Holding Company and its
subsidiary Bank's probable performance will continue to lag behind the
peer averages. However, management desires to improve performance over time
so that eventually, performance of all units will exceed peer group averages.
It is appropriate to encourage management to take the necessary actions in the
shortrun that will enable it to achieve and exceed parity with its peers in the
future. As a result, the plan calls for emphasis on achievement of internal
profit benchmarks in the first few years, rather than on peer comparisons. The
schedule below presents the Profit Objective Performance (POP) and Relative
Return on Performance (ROAR) weights to be used in the Plan for 1995-1998:
<TABLE>
<CAPTION>
==============================================================================
YEAR ROAR POP
==============================================================================
<S> <C> <C>
1995 30% 70%
- ------------------------------------------------------------------------------
1996 35% 65%
- ------------------------------------------------------------------------------
1997 40% 60%
- ------------------------------------------------------------------------------
1998 50% 50%
==============================================================================
</TABLE>
These weights will be used to determine the influence of internal profitability
achievement and external peer comparison on Group I and II participants'
incentive opportunity. They will also be used as modifiers for determining
adjusted Group III incentive awards.
The objective will be to meet a 50-50 weighting by 1998.
22
<PAGE>
APPENDIX A: CONT'D
-----------
POP AND ROAR FACTOR WEIGHTS
---------------------------
AND REQUIRED PERFORMANCE LEVELS 1995-1998
-----------------------------------------
REQUIRED PERFORMANCE LEVELS
- ---------------------------
Over time, VCNB and its subsidiary Banks will be required to meet progressively
more challenging performance levels with respect to their peers. The following
schedule indicates the levels of achievement with respect to peer performance
required to meet threshold, target and maximum levels of ROAR-based incentive
payouts, expressed in percentiles:
<TABLE>
<CAPTION>
===============================================================================
RELATIVE RETURN ON ASSETS COMPARED TO PEERS (PERCENTILE)
YEAR ----------------------------------------------------------------
THRESHOLD TARGET MAXIMUM
===============================================================================
<S> <C> <C> <C>
1995 45th Percentile 60th Percentile 75th Percentile
- -------------------------------------------------------------------------------
1996 45th 65th 80th
- -------------------------------------------------------------------------------
1997 50th 70th 85th
- -------------------------------------------------------------------------------
1998 50th 75th 90th
===============================================================================
</TABLE>
23
<PAGE>
APPENDIX B
SAMPLE PEER COMPARISON GROUP VCNB - THIRD QUARTER 1994
<TABLE>
<CAPTION>
Return
on Average
Holding Company City Total Assets Assets (%)
9/94 9/94
($ 000) (Y-T-D)
<S> <C> <C> <C>
TRICO BANCSHARES CHICO $595,310 0.97
HOME INTERSTATE BANCORP SIGNAL HILL $463,466 0.77
SC BANCORP DOWNEY $404,358 0.62
TRANSWORLD BANCORP SHERMAN OAKS $384,990 0.64
FREMONT VANCORPORATION FREMONT $344,580 1.39
PACIFIC CAPITAL BANCORP SALINAS $339,074 1.22
FOOTHILL INDEPENDENT BANCORP GLENDORA $325,711 1.03
CCB BANCORP, INC. SANTA ANA $314,366 -2.1
ELDORADO BANCORP TUSTIN $311,382 0.76
CALIFORNIA COMMERCIAL BKSHRS NEWPORT BEACH $305,264 0.17
PROFESSIONAL BANCORP SANTA MONICA $304,186 0.26
RCB CORPORATION SACRAMENTO $302,980 0.28
VENTURA COUNTY NATL BANCORP OXNARD $281,049 0.21
CU BANCORP ENCINO $280,436 0.95
SIERRA TAHOE BANCORP TRUCKEE $264,357 1.01
LANDMARK BANCORP LA HABRA $264,111 0.72
CIVIC BANCORP OAKLAND $257,938 0.58
NORTH COUNTY BANCORP ESCONDIDO $252,935 0.53
ORIENT BANCORPORATION SAN FRANCISCO $243,989 0.36
AKTIV BANK HOLDING COMPANY LONG BEACH $242,670 0.71
NATIONAL MERCANTILE BANCORP LOS ANGELES $234,334 -1.63
CUPERTINO NATIONAL BANCORP CUPERTINO $216,319 0.79
NORTH VALLEY BANCORP REDDING $213,709 1.43
MONTECITO BANCORP SANTA BARBARA $202,804 0.46
ORANGE NATIONAL BANCORP ORANGE $196,573 0.36
</TABLE>
24
<PAGE>
APPENDIX B
SAMPLE PEER COMPARISON GROUP VENTURA COUNTY NATIONAL BANK
THIRD QUARTER 1994
<TABLE>
<CAPTION>
Return
Total on Average
Assets Assets
Institution Name City County 9/94 9/94
($ 000) (Y-T-D)
<S> <C> <C> <C> <C>
HANMI BK LOS ANGELES LOS ANGELES $340,655 1.11
FOOTHILL INDEPENDENT BK GLENDORA LOS ANGELES $324,148 1.08
WESTERN BK LOS ANGELES LOS ANGELES $312,478 0.81
FIRST PROFESSIONAL BK LA NA SANTA MONICA LOS ANGELES $302,997 0.45
CALIFORNIA UNITED BK NA ENCINO LOS ANGELES $280,434 1.03
AMERICAN PACIFIC ST BK SHERMAN OAKS LOS ANGELES $277,579 0.67
CALIFORNIA CENTER BANK LOS ANGELES LOS ANGELES $244,950 1.01
NATIONAL BK OF LONG BEACH LONG BEACH LOS ANGELES $242,298 0.72
MERCANTILE NB LOS ANGELES LOS ANGELES $234,333 -1.6
BANK OF SANTA MARIA SANTA MARIA SANTA BARBARA $214,031 1.03
UNITED NB MONTEREY PARK VENTURA $211,300 1.33
BANK OF MONTECITO SANTA BARBARA LOS ANGELES $202,118 0.51
VENTURA COUNTY NB OXNARD LOS ANGELES $196,592 0.04
HARBOR BK LONG BEACH LOS ANGELES $179,887 0.36
PREFERRED BK LOS ANGELES LOS ANGELES $177,220 1.07
CENTURY BANK LOS ANGELES LOS ANGELES $175,090 -3.81
US TC OF CALIFORNIA NA LOS ANGELES LOS ANGELES $168,608 1.74
PACIFIC HERITAGE BK TORRANCE LOS ANGELES $156,275 -3.1
FIRST CHARTER BK NA BEVERLY HILLS LOS ANGELES $156,071 -1.76
INTERNATIONAL BK OF CA LOS ANGELES LOS ANGELES $152,406 -0.9
FIRST CREDIT BK LOS ANGELES LOS ANGELES $147,335 2.32
CITIZENS COMMERCIAL T&SB PASADENA LOS ANGELES $138,415 0.52
FIRST VALLEY BK LOMPOC SANTA BARBARA $113,698 1.08
CITY COMMERCE BK SANTA BARBARA SANTA BARBARA $111,303 0.76
AMERICAN COMMERCIAL BK VENTURA VENTURA $111,271 0.76
</TABLE>
25
<PAGE>
APPENDIX B
SAMPLE PEER COMPARISON GROUP: FRONTIER BANK-THIRD QUARTER 1994
<TABLE>
<CAPTION>
Return
Total on Average
Institution Name City Assets Assets
9/94 9/94
($ 000) (Y-T-D)
<S> <C> <C> <C>
FIRST CENTRAL BK NA CERRITOS $113,498 -0.25
FOUNDERS NB LOS ANGELES $112,080 0.86
BANK AUDI CA LOS ANGELES $109,957 0.75
MARINE NB IRVINE $106,821 -0.33
LIPPOBANK LOS ANGELES $106,288 0.21
NATIONAL BK OF CALIFORNIA LOS ANGELES $102,947 0.2
MARATHON NB LOS ANGELES $ 98,960 0.01
CERRITOS VALLEY BK NORWALK $ 97,430 0.6
HUNTINGTON NB HUNTINGTON BEACH $ 95,066 0.52
FIRST CONTINENTAL BK ROSEMEAD $ 94,930 1.47
GRAND NB SANTA ANA $ 89,955 1.4
WILSHIRE ST BK LOS ANGELES $ 89,584 -0.13
FRONTIER BK NA LA PALMA $ 89,100 0.56
TRANS NB MONTEREY PARK $ 88,620 2.49
EASTERN INTERNATIONAL BK ALHAMBRA $ 87,787 0.92
GILMORE COMMERCIAL & SVG BK LOS ANGELES $ 81,963 0.93
LOS ANGELES NB BUENA PARK $ 81,684 0.85
SOUTH BAY BK TORRANCE $ 81,361 -2.1
MARINERS BK SAN CLEMENTE $ 80,310 -0.1
PACIFIC WESTERN NB PICO RIVERA $ 79,216 0.93
VALENCIA NB VALENCIA $ 79,148 0.4
CHARTER PACIFIC BK AGOURA HILLS $ 77,467 -1.38
CORPORATE BK SANTA ANA $ 77,378 0.39
COMMERCE NB COMMERCE $ 75,540 0.62
PACIFIC INLAND BK ANAHEIM $ 72,449 -3.31
</TABLE>
26
<PAGE>
APPENDIX C
----------
CALCULATION OF THE RELATIVE RETURN ON ASSETS (ROAR) MEASURE
-----------------------------------------------------------
DETERMINING PERFORMANCE LEVELS
- ------------------------------
1. VCNB and its subsidiary Banks' performance levels are determined by
calculating their percentile rankings in their respective Peer Group based
on ROA ratios. This example will use the VCNB peer group.
2. After obtaining four cumulative quarters of data for the 24 VCNB Peer
Group bank holding companies, arrange the Peer Group ROA ratios in
descending order and sequentially number each entry beginning at the
----------------
bottom. (See example 1). Place VCNB in the group, as determined by its
------
ROA.
3. VCNB performance level (expressed as a percentile) =
VCNB rank with Peer Group - 0.5
-------------------------------
# of institutions
4. Determine VCNB's performance Level (See Example 1)
VCNB rank = 4th from the bottom of the group
# institutions = 25
VCNB Performance Level = (4-0.5)
-------
25
VCNB Performance Level = 14th Percentile
27
<PAGE>
EXAMPLE 1
SAMPLE PEER COMPARISON GROUP VCNB-THIRD QUARTER 1994
TWENTY-FOUR CLOSEST IN SIZE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Return
on Average
Holding Company City Total Assets Assets (%)
9/94 9/94
($ 000) (Y-T-D)
<S> <C> <C> <C>
25 NORTH VALLEY BANCORP REDDING $213,709 1.43
24 FREMONT BANCORPORATION FREMONT $344,580 1.39
23 PACIFIC CAPITAL BANCORP SALINAS $339,074 1.22
22 FOOTHILL INDEPENDENT BANCORP GLENDORA $325,711 1.03
21 SIERRA TAHOE BANCORP TRUCKEE $264,357 1.01
20 TRICO BANCSHARES CHICO $595,310 0.97
19 CU BANCORP ENCINO $280,436 0.95
18 CUPERTINO NATIONAL BANCORP CUPERTINO $216,319 0.79
17 HOME INTERSTATE BANCORP SIGNAL HILL $463,466 0.77
16 ELDORADO BANCORP TUSTIN $311,382 0.76
15 LANDMARK BANCORP LA HABRA $264,111 0.72
14 AKTIV BANK HOLDING COMPANY LONG BEACH $242,670 0.71
13 TRANSWORLD BANCORP SHERMAN OAKS $384,990 0.64
12 SC BANCORP DOWNEY $404,358 0.62
11 CIVIC BANCORP OAKLAND $257,938 0.58
10 NORTH COUNTY BANCORP ESCONDIDO $252,935 0.53
9 MONTECITO BANCORP SANTA BARBARA $202,804 0.46
8 ORANGE NATIONAL BANCORP ORANGE $196,573 0.36
7 ORIENT BANCORPORATION SAN FRANCISCO $243,989 0.36
6 RCB CORPORATION SACRAMENTO $302,980 0.28
5 PROFESSIONAL BANCORP SANTA MONICA $304,186 0.26
4 VENTURA COUNTY NATL BANCORP OXNARD $281,049 0.21
3 CALIFORNIA COMMERCIAL BKSHRS NEWPORT BEACH $305,264 0.17
2 NATIONAL MERCANTILE BANCORP LOS ANGELES $234,334 -1.63
1 CCB BANCORP, INC. SANTA ANA $314,366 -2.1
</TABLE>
28
<PAGE>
EXHIBIT 11
Computation of per share income (loss)(a)
- -----------------------------------------
<TABLE>
<CAPTION>
for the years ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
<S> <C> <C> <C>
Net Income (loss) used to compute primary earnings per share $ 3,768 $ (262) $ (12,087)
Net Income (loss) used to compute fully diluted earnings per share $ 3,768 $ (262) $ (12,087)
Primary Earnings (Loss) per Share:
Average Number of shares and equivalents outstanding:
Common Stock and Common Stock equivalents 7,833,058 6,333,835 5,635,941
Primary earnings per share $ .48 $ (.04) $ (2.15)
=====================================================================================================================
Fully Diluted Earnings (Loss) per Share:
Average Number of shares and equivalents outstanding:
Common Stock and Common Stock equivalents 7,833,058 6,333,835 5,635,941
Fully diluted earnings (loss) per share $ .48 (a) (a)
=====================================================================================================================
</TABLE>
(a) Nothing is reported for fully diluted per share amounts for loss years, as
conversion of common stock equivalents is antidilutive.
<PAGE>
EXHIBIT 13
Annual Report to Shareholders
- -----------------------------
MARKET PRICE OF COMMON STOCK AND DIVIDENDS
The Common Stock is included for quotation on the Nasdaq National Market. The
following table sets forth the high and low sales prices for each of the eight
quarters ended December 31, 1995, as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ---- ---
<S> <C> <C>
March 31, 1994................ 2.38 1.88
June 30, 1994................. 3.25 1.75
September 30, 1994............ 3.13 2.75
December 31, 1994............. 2.94 2.00
March 31, 1995................ 2.38 2.13
June 30, 1995................. 2.50 2.25
September 30, 1995............ 4.13 2.38
December 31, 1995............. 4.00 3.38
</TABLE>
Parent has never paid a cash dividend on the Common Stock and there can be no
assurance that Parent will generate earnings in the future which would permit
the declaration of dividends. Parent is prohibited by the terms of the MOU from
declaring or paying a dividend without fifteen days prior notice to the Reserve
Bank, which may prohibit the payment of dividends.
In addition, the source of any such dividends is likely to be dividends
fromVentura or Frontier. Frontier is also limited in the amount of dividends
which it may distribute according to the terms of the Consent Order. Pursuant to
the Consent Order, the Board of Directors may declare or pay dividends only: (i)
when Frontier is in compliance with 12 U.S.C. sections 56, 60, and 1831o(d)(1);
(ii) when Frontier is in compliance with the capital program developed pursuant
to the Consent Order; (iii) when such dividend payment is consistent with the
capital levels specified in paragraph (1) of the Consent Order; and (iv) with
prior written approval of the District Administrator of the OCC, pursuant to the
Consent Order. See "Supervision and Regulation--Restrictions on Transfers of
Funds to Parent by the Banks." Furthermore, it is anticipated that for the
foreseeable future any earnings which may be generated will be retained for the
purpose of increasing the Company's capital and reserves in order to facilitate
growth.
SUMMARY SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table presents selected consolidated financial and other data of
the Company as of and for each of the years in the five years ended December 31,
1995. The data as of and for each of the five years in the period ended December
31, 1995 should be read in conjunction with, and is qualified in its entirety
by, the more detailed information included elsewhere, including the Company's
audited Consolidated Financial Statements and the Notes thereto.
<TABLE>
<CAPTION>
as of and for the years ended December 31, 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total Assets $267,756 $257,755 $340,529 $400,195 $364,734
Loans and leases, net of unearned income 157,765 167,934 267,514 312,592 299,267
Reserve for Loan Losses 5,401 8,261 14,313 3,854 2,845
Total Deposits 236,072 236,342 318,289 348,587 324,486
Shareholders' equity 29,459 19,052 20,370 30,388 29,179
Outstanding shares of common stock, no par value 9,226,723 6,333,835 6,333,835 5,614,255 5,282,301
Shareholders of record 1,024 1,057 1,078 1,122 1,139
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
as of and for the years ended December 31, 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
ASSET QUALITY:
Nonperforming loans (1) $ 4,442 $ 7,945 $ 19,839 $ 3,254 $ 9,454
Nonperforming assets (1) 8,022 11,169 22,068 7,194 11,660
ASSET QUALITY RATIOS:
Nonperforming loans to total loans 2.81% 4.73% 7.41% 1.04% 3.16%
Nonperforming assets to total assets 3.00 4.33 6.48 1.79 3.15
Loan loss reserves to nonperforming loans 121.62 103.98 72.15 118.44 30.09
Loan loss reserves to nonperforming assets 67.33 73.96 64.86 53.57 24.78
Classified assets to loan loss reserve plus shareholders' equity 44.44 113.27 186.27 84.71 67.45
OTHER DATA:
Full time equivalent employees 127 141 199 198 221
STATEMENT OF OPERATIONS DATA:
Net interest income $14,437 $15,868 $ 16,912 $17,586 $17,931
Provision for loan losses 410 3,825 16,213 3,404 2,537
Noninterest income 2,246 4,064 4,820 5,512 5,364
Noninterest expenses 14,937 16,084 20,839 18,438 19,239
Income (loss) before income taxes (benefit) 1,336 23 (15,320) 1,256 1,519
Provision for income taxes (benefit) (2,432) 285 (3,233) 571 713
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 3,768 $ (262) $(12,087) $ 685 $ 806
====================================================================================================================
PER SHARE DATA:(2)
Income (loss) before income taxes (benefit) $ .17 $ .00 $ (2.73) $ .22 $ .27
Net income (loss) per share .48 (0.04) (2.15) .12 .14
Period end book value per share 3.19 3.01 3.22 5.41 5.21
SELECTED PERFORMANCE RATIOS:
Return on average equity 15.64% (1.29)% (45.12)% 2.30% 2.79%
Return on average assets 1.49 (0.09) (3.18) 0.18 0.22
Efficiency ratio (3) 89.53 80.71 95.89 79.83 82.59
Noninterest expense to average assets 5.89 5.45 5.47 4.74 5.14
Net interest margin 6.15 5.68 4.81 4.95 5.34
Net interest rate spread 5.00% 4.80% 3.96% 4.27% 5.06%
</TABLE>
______________________________
(1) Does not include $3.3 million and $2.0 million in troubled debt
restructuring that were performing at December 31, 1995, and 1994.
(2) All per share data included herein have been adjusted to reflect the stock
splits and stock dividends to shareholders of record on March 7, 1991, and
March 9, 1992.
(3) The efficiency ratio is other expenses divided by the sum of net interest
income before provision for loan losses plus other income.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following presents management's discussion and analysis of the consolidated
financial condition and operating results of the Company as of and for the years
ended December 31, 1995, 1994, and 1993. The discussion should be read in
conjunction with the Company's audited Consolidated Financial Statements and
Notes.
OVERVIEW
The Company had net income of $3.8 million or $0.48 per share for the year ended
December 31, 1995, compared to a net loss of $262 thousand or $0.04 per share
for the year ended December 31, 1994. The significant improvement over 1994 was
a result of a decrease in the provision for loan losses, reduced noninterest
expenses and the release of the valuation reserve previously held against
deferred tax assets, offset by lower net interest income and noninterest income.
The net loss incurred in 1994 was partially offset by gains on the sale of
mortgage servicing rights and the merchant card portfolio totaling $1.4 million
and $174 thousand, respectively. The decrease in the provision for loan losses
was a result of decreases in gross loans and classified loan balances of $10.2
million and $15.3 million, respectively, from 1994 to 1995. The decrease in
noninterest expense results from lower holding
2
<PAGE>
costs and reduced fair value adjustments on the sale of Real Estate Owned
("REO") properties, lower legal and consulting fees, reduced appraisal fees and
mortgage servicing expenses, and lower FDIC/Comptroller assessments. Current
year net income includes the release of the valuation reserve previously held
against the deferred tax assets, which resulted in a net tax benefit of $2.4
million.
Total assets increased 3.9% from December 31, 1994, to December 31, 1995, as a
result of increased capital from the common stock rights offering completed
during the second quarter of 1995 and funding from the Company's profitability.
The Company had a net loss of $262 thousand for the year ended December 31,
1994, compared to a net loss of $12.1 million for the year ended December 31,
1993. The improvement over 1993 was due to a significant decrease in the
provision for loan losses, reduced noninterest expense and improved net interest
income in 1994.
Total assets decreased 24.3% from December 31, 1993, to December 31, 1994.
During 1994, the balance sheet was reduced for liquidity purposes, as well as to
achieve compliance with the capital requirements of the Banks' regulatory
agreements.
FINANCIAL CONDITION
Total assets at December 31, 1995, increased $10.0 million, or 3.9% to $267.8
million, from $257.8 million at December 31, 1994. Most of the increase is in
cash and overnight Federal funds investments offset by lower year end balances
for investment securities and loans. The Company raised gross proceeds of $6.5
million in capital during 1995 through the common stock rights offering. Net
loans and leases decreased $7.3 million or 4.6% from year end 1994, primarily
due to the planned payoff of loans and the reduction in classified loans. The
reduction in classified loans is due to loan payoffs and from transfers to OREO
of $4.4 million, of which $4.1 million were subsequently sold prior to year end.
Total assets decreased $83.0 million from $340.6 million at December 31, 1993,
to $257.8 million at December 31, 1994. This decrease resulted from management's
efforts to reduce the loan to deposit ratio, increase capital ratios and improve
liquidity by tightening underwriting criteria, selling nonperforming loans at a
discount and marketing loan participations. Additionally, to reduce volatility
in the Banks' deposit bases, the Company allowed significant runoff of title and
escrow demand deposits and institutional certificates of deposit during 1994.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, deposits at correspondent
banks and interest-bearing amounts due from banks. The Company maintains
balances at correspondent banks adequate to cover daily inclearings and other
charges. In accordance with Federal regulations, average reserve balances of
$1.7 million were maintained in the form of deposits with the Federal Reserve
Bank for the year ended December 31, 1995.
Cash and cash equivalents increased $8.5 million from $11.4 million at year end
1994 to $19.9 million at December 31, 1995. Most of the increase resulted from
the increase in the compensating balance requirements with correspondent banks
due to volume increases. Cash and cash equivalents decreased $4.5 million from
$15.9 million at December 31, 1993 to $11.4 million at December 31, 1994.
Federal funds sold
The Company invests or sells its excess cash balances in overnight Federal
funds. federal funds sold at December 31, 1995, were $47.5 million as compared
to $27.0 million at December 31, 1994. During 1995, the yield curve inverted;
overnight federal funds yields were the equivalent of US Treasury securities
with 5 or 7 year maturities. Management decided to maintain high levels of
overnight federal funds investments to increase net interest income and margins
during this yield curve inversion.
Federal funds sold at December 31, 1994, increased $9.0 million from $18.0
million at December 31, 1993, due to improvements in the Company's liquidity
during 1994.
Investment Securities
Investment securities at December 31, 1995, were $36.6 million and did not
include any securities classified at held-to-maturity. In November 1995, the
Financial Accounting Standards Board ("FASB") issued a "Guide to Implementation
of Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities: Questions and Answers" (the "Guide"). The Guide allowed for a one
time reassessment of the classification of all securities
3
<PAGE>
and, in connection with such reassessment, permitted the reclassification of
securities from the held-to-maturity classification to the available-for-sale
classification as of a single date no later than December 31, 1995, without
calling into question management's intent to hold to maturity the remaining
securities classified as held-to-maturity. On December 21, 1995, the Company
transferred its entire portfolio of held-to-maturity securities with an
amortized cost of $20.2 million to the available-for-sale classification to
allow for greater flexibility in the Company's investment portfolio. The
transfer resulted in an unrealized gain of $186 thousand, net of the unamortized
portion of unrealized loss recorded when certain securities were transferred
from the available-for-sale to held-to-maturity classification during 1994. The
unrealized gain will remain as a separate component of shareholders' equity
until the securities are sold or mature.
Investment securities consist of U.S. Government, U.S. Government Agency and
mortgage-backed securities. Mortgage-backed securities consisted entirely of
Federal Home Loan Mortgage Corporation pass through certificates at December 31,
1995. The Company did not have structured notes, CMOs or other derivative
products in the portfolios at December 31, 1995 or 1994.
Investment securities decreased $14.0 million to $36.6 million at December 31,
1995, from $50.6 million at December 31, 1994. Available-for-sale securities
were sold at a slight net gain during 1995. The proceeds from sales were
reinvested in overnight federal funds to take advantage of the inverted yield
curve. At December 31, 1995, the average life of the mortgage-backed securities
was approximately 3 years; the average maturities of mortgage-backed securities
was approximately 9 years.
The net unrealized loss on available-for-sale securities decreased $563 thousand
to $615 thousand from $1.2 million at December 31, 1995, and 1994, respectively.
In accordance with SFAS No. 115, the net unrealized gain or loss from increases
or decreases in the fair value of available-for-sale securities is reported as a
separate component of shareholders' equity, net of related income tax effects.
The decrease in the unrealized loss from 1994, was due to an increase in the
fair values of the available-for-sale securities and a net gain of $186 thousand
upon transfer from the held-to-maturity portfolio.
On December 31, 1993, the Company adopted SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." In connection with the adoption of
SFAS No. 115, the Company classified all of its investment securities as
available for sale and recorded unrealized loss of $122 thousand, net of tax
effect. During 1994, the Company purchased securities which were classified as
either available-for-sale or held-to-maturity at the time of purchase, based on
management's intent and ability to hold certain investments to maturity. The
Company transferred mortgage backed securities with unrealized losses of $472
thousand from available-for-sale to held-to-maturity during 1994 due to a change
in intent to hold the securities to maturity. Certain of these securities were
transferred back to the available-for-sale portfolio during 1995 in accordance
with the one-time reclassification of held-to-maturity securities permitted by
the Guide.
As of December 31, 1994, approximately $18.8 million of securities were
classified at their amortized cost as held-to-maturity. Most of this balance was
comprised of mortgage-backed securities that were transferred from the
available-for-sale portfolio. Unrealized losses of $433 thousand previously
recorded for these securities were included in shareholders' equity at December
31, 1994.
At December 31, 1994, the average life of mortgage-backed securities was
approximately 3.5 years; the average maturities of mortgage-backed securities
was approximately 10 years.
4
<PAGE>
Loans
The Company engages in loans to small to medium-sized businesses in its service
areas. The Company also originates and sells Small Business Administration
("SBA") loans. The interest rates charged for the loans made by the Company vary
with the degree of risk, the size and maturity of the loan, whether the loan has
a fixed or variable rate, the borrowers' depository relationship with the
Company, and prevailing market interest rates. The Company is primarily a
commercial lender, and most of its loans are floating rate loans tied to prime.
The balance of loans outstanding at year end decreased for the second straight
year from $167.9 million to $157.8 million at December 31, 1995, and 1994,
respectively. Approximately $3.3 million of the decrease was due to the
repayment of nonaccrual loans, which decreased to $4.3 million, down from $7.6
million at December 31, 1995, and 1994, respectively. A discussion of the
activity in the Company's loan portfolios follows.
Commercial, Financial, and Agricultural
This category includes secured commercial loans, SBA loans, asset based loans,
loans to developers, unsecured commercial loans, and medium-term real estate
loans. Commercial, financial and agricultural loans increased slightly to $142.4
million from $138.2 million at December 31, 1995, and 1994, respectively.
Commercial Loans
This category constitutes the core of the Company's business. Included in this
category are commercial loans made to medium-sized businesses which include
revolving lines of credit, term loans for working capital or short-term
commercial needs, and medium-term commercial real estate loans. Management will
generally require the borrower to pledge certain of the borrower's assets to
support the credits with terms limited to one year or less. Medium-term
commercial real estate loans are those credits made for the financing of a
commercial or industrial building where the property has income derived from
tenants ("investment properties") or used by the owner for business purposes
("owner-user properties").
Commercial loans decreased $18.8 million to $112.3 million as of December 31,
1995. Most of this decrease was in medium-term commercial real estate loans,
particularly those loans secured by investment properties, that was partially
offset by increased balances for non-real estate secured commercial loans. To
the extent that medium-term commercial real estate loans are made, they are
generally limited to owner-user properties or for companies that also have other
banking relationships with the Company. Management believes these medium-term
commercial real estate loans have less risk as the Company has a broader
knowledge and better control over the overall borrowing relationship.
As of December 31, 1994, commercial loans decreased $59.2 million to $167.9
million from $227.1 million as of December 31, 1993. The Company sold
approximately $25 million of loans in a bulk sale during May 1994. Another
decrease of approximately $10 million was due to loan workouts and collections,
and finally, management believes that additional prepayments of approximately $7
million were a result of the market conditions at that time.
SBA Loans
Through its SBA Division, Frontier offers loans for equipment, working capital,
debt repayment and construction, and acquisition of owner-user commercial real
estate. Frontier originates loans under both the 7(a) and 504 loan programs,
with a particular emphasis on the 7(a) program. Frontier has been authorized by
the SBA to make 7(a) loans since 1983. Frontier has been designated as a PLP
lender in the 7(a) program by the SBA. This designation, which has been granted
to fewer than 1% of all SBA lenders nationwide, allows Frontier to directly
approve the guaranty request on behalf of SBA, and requires Frontier send to SBA
only a streamlined informational loan file. The guaranteed portions of SBA 7(a)
loans are normally sold by Frontier to secondary market investors at a premium.
Frontier continues to service the whole loan, and is required by the SBA to
maintain a minimum 1% servicing spread on the sold portion.
The guaranteed portion of SBA loans originated for sale is reported at the lower
of cost or fair value in the consolidated balance sheets. SBA loans acquired for
investment are reported at amortized cost in the consolidated balance sheets.
SBA loans increased $17.3 million from $12.8 million to $30.1 million at
December 31, 1995, and 1994, respectively. Most of this increase resulted from
the purchase of approximately $11 million of SBA loans by Ventura. The rest of
the increase was due to the Frontier SBA loan program.
5
<PAGE>
Real Estate - Mortgage Loans
Included in this category are loans for single family residences (conforming
loans) and home equity loans. The Company sold its residential mortgage
origination operations in 1994, and no longer originates residential mortgages
for the acquisition of homes, unless it is for the sole purpose of accommodating
an existing business borrower. The $4.1 million decrease in mortgage loans
during 1995 was due to the programmed reduction in mortgage loans and reduced
mortgage activity after the Company sold its mortgage operations in 1994. From
December 31, 1993 to December 31, 1994, mortgage loans decreased $31.2 million,
which reflects the 1994 sale.
Real Estate - Construction Loans
Ventura provides real estate construction loans for custom residential and
residential tract development projects, as well as commercial developments.
Management has implemented a policy to maintain real estate construction loans
at 10% to 15% of the total portfolio. Real estate construction loans decreased
from $7.7 million at December 31, 1994, to $1.5 million at December 31, 1995.
The decreases in real estate construction loans reflects the absence of demand
for new construction in the Banks' service areas during the past two years.
Installment Loans
Installment loans consist mainly of fully amortizing credits for the purchase of
capital goods and consumer purchases. Installment loans decreased $2.9 million
from $9.9 million at December 31, 1994, to $7.0 million at December 31, 1995.
The decrease in installment loans principally resulted from the sale of the
Company's merchant credit card operations in 1994.
ASSET QUALITY
Loan Loss Reserves and Nonperforming Loans
The Company maintains a loan loss reserve which it considers adequate to cover
the risk of losses in the loan and lease portfolio. The charge to expense is
based on management's evaluation of the quality of the loan and lease portfolio,
the level of classified loans and leases, total outstanding loans and leases,
losses previously charged against the reserve, and current and anticipated
economic conditions. Management also considers certain elements in the portfolio
and the grading systems used to measure the quality of the portfolio. These
factors include industry concentrations and collateral concentrations. In
response to the recession in Southern California and the decline in real estate
values, the Company assessed the value of collateral for loans, particularly
those secured by real estate. If during this process a shortfall ensued, the
Company then recorded a charge-off or provided a specific reserve to reflect the
current market value of the loan. The Company expanded the Loan Administration
and Special Assets Departments to improve overall asset quality through problem
loan management and risk and collateral value identification. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the adequacy of the Company's loan loss reserve. Such
agencies may require the Company to recognize additions to the loan loss reserve
based upon their judgment of the information available to them at the time of
their examination.
6
<PAGE>
The following table sets forth nonaccrual loans, loans which were delinquent for
90 days or more but still accruing, loan that are accounted for as "troubled
debt restructurings" ("TDRs"), real estate owned ("REO") and potential problem
loans at the dates indicated.
<TABLE>
<CAPTION>
as of December 31, 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis $4,341 $7,612 $18,939 $2,464 $2,142
Accruing loans which are 90 days or
more past due as to interest or principal 101 331 552 410 7,296
TDR's (1) -- 2 384 380 16
-------------------------------------------------
Total nonperforming loans 4,442 7,945 19,839 3,254 9,454
Foreclosed personalty 878 878 -- -- --
REO 2,702 2,346 2,229 3,940 2,206
-------------------------------------------------
Total nonperforming assets $8,022 $11,169 $22,068 $7,194 $11,660
=================================================
</TABLE>
___________________________________
(1) Does not include loans which have been restructured and which were
previously on nonaccrual status but have been performing in accordance
with their restructured terms for some minimum period of time,
typically at least six months. At December 31, 1995 and 1994, the
Company had such loans in the amounts of $3.3 million and $2.0
million, respectively.
Premises and Equipment, Net
Fixed assets, net of depreciation, increased from $1.9 million at December 31,
1994 to $2.4 million at December 31, 1995, due to the purchase of the Wilmington
branch and related building improvements that were made to the facility, net of
an inventory adjustment of $115 thousand. Fixed assets, net of depreciation,
increased from $1.7 million at December 31, 1993 to $1.9 million at December 31,
1994. The fluctuations since 1993 have resulted from accumulated depreciation
charges and the acceleration of depreciation related to data processing
equipment and leaseholds, offset by the purchase of and capitalized costs
related to the Wilmington branch during 1995.
Other Assets
Other assets increased $2.6 million to $9.0 million at December 31, 1995. Most
of the increase resulted from the reversal of valuation reserves against the
Company's deferred tax assets. Other assets decreased from $8.7 million to $6.4
million at December 31, 1993, and 1994, respectively. This reduction was
primarily a result of the reduction in tax assets.
REO
At December 31, 1995, the Company had $2.7 million in REO comprised of eight
commercial properties with carrying values totaling $2.0 million and three
parcels of land zoned for residential purposes valued at $679 thousand. The
Company sold $4.2 million of REO during 1995 and incurred REO valuation
adjustments and property maintenance expenses of $525 thousand. At December 31,
1994, the Company had $2.3 million in REO comprised of three commercial
properties with carrying values totaling $2.2 million, one single family
residence valued at $100 thousand and land zoned for residential purposes of $50
thousand. The Company sold $4.8 million of REO during 1994 and incurred REO
valuation adjustments and property maintenance expenses of $641 thousand; these
net expenses were reported as noninterest expense in the consolidated statements
of operations. REO is carried at the lower of cost or current fair market value
less estimated selling costs in the consolidated balance sheets as a component
of other assets. As of December 31, 1995, all REO properties held at December
31, 1994, with the exception of one residential lot, had been sold. Loans to
facilitate the sale of REO during 1995 totaled $2.2 million. These loans were
made in accordance with the Company's credit policies and under similar terms
extended to credit-worthy borrowers. There were no loans to facilitate the sale
of REO during 1994.
Deposits
Total deposits remained relatively constant at $236.1 million and $236.3 million
as of December 31, 1995, and 1994, respectively. The year end composition of
deposits changed slightly from December 31, 1994. Interest-bearing demand and
savings account balances decreased $3.5 million to $77.1 million from $80.6
million at December 31, 1995. Time certificates of deposit increased $2.4
million to $90.9 million from $88.5 million at December 31, 1994. The increase
in year end balances resulted from a special promotion by Ventura in December
1995.
7
<PAGE>
Notes Payable and Other Liabilities
The Company repaid $125 thousand of notes payable during 1995 from the proceeds
raised through the common stock rights offering during the second quarter of
1995. The Company did not purchase federal funds during 1995, as compared to
average federal funds purchased in 1994 of $44 thousand.
Shareholders' Equity
The Company completed a rights offering to shareholders for which gross proceeds
of $6.5 million were wired to the Parent in June 1995. A total of 2,888,888
common shares were issued in connection with this transaction and the net
proceeds amounted to $5.5 million. A substantial portion of the proceeds from
the offering were paid to Ventura for reimbursement of $3.3 million in
connection with interest paid to the Parent on deposits of funds generated by
commercial paper sales. Shareholders' equity totaled $29.5 million at December
31, 1995, an increase of 54.6% from $19.1 million at December 31, 1994.
RESULTS OF OPERATIONS
1995 COMPARED WITH 1994
Net Interest Income and Net Interest Margin
The following tables present, for the periods indicated, condensed average
balance sheet information for the Company, together with interest income and
yields earned on average interest-earning assets and interest expense and rates
paid on average interest-bearing liabilities. Average balances are average daily
balances. Nonacccrual loans are included in loans.
8
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
Average Income/ Yield/ Average Income/ Yield/ Average
balance Expense Rate balance Expense Rate balance
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS (dollars in thousands)
Interest-earning assets:
Loans, net of deferred fees (1) $ 159,899 $ 16,375 10.24% $ 212,029 $ 18,740 8.84% $ 289,675
Investment securities 43,290 2,586 5.97% 37,736 2,169 5.75% 37,935
Bank-owned TCD 391 21 5.37% 1,311 67 5.11% 5,645
Fed funds sold 31,332 1,816 5.80% 26,536 1,160 4.37% 18,431
- ------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets/interest income 234,912 20,798 8.85% 277,612 22,136 7.97% 351,686
- ------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 16,600 19,353 25,717
Allowance for loan losses (7,108) (11,237) (9,309)
Premises and equipment 2,091 1,862 2,273
Other assets 7,706 7,704 10,594
- ------------------------------------------------------------------------------------------------------------------------------
Noninterest earning assets 19,289 17,682 29,275
- ------------------------------------------------------------------------------------------------------------------------------
Total average assets $ 254,201 $ 295,294 $ 380,961
==============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW/MMDA $ 52,895 $ 1,390 2.63% $ 58,114 $ 1,540 2.65% $ 66,167
Savings 27,707 653 2.36% 34,575 821 2.37% 37,892
TCDs 84,337 4,314 5.12% 104,671 3,892 3.72% 142,020
- ------------------------------------------------------------------------------------------------------------------------------
Deposits 164,939 6,357 3.85% 197,360 6,253 3.17% 246,079
- ------------------------------------------------------------------------------------------------------------------------------
Notes payable 68 4 5.88% 125 9 7.20% 1,908
Commercial paper - - - - - - 6,987
Fed funds purchased - - - 44 1 2.27% 1,376
Repurchase agreements - - - 129 5 3.88% 7,447
- ------------------------------------------------------------------------------------------------------------------------------
Other interest-bearing liabilities 68 4 5.88% 298 15 5.03% 17,718
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities/interest
expense 165,007 6,361 3.85% 197,658 6,268 3.17% 263,797
- ------------------------------------------------------------------------------------------------------------------------------
Demand deposits 62,980 75,568 87,383
Other liabilities 2,128 1,965 (7,008)
- ------------------------------------------------------------------------------------------------------------------------------
Noninterest bearing liabilities 65,108 77,533 80,375
Shareholders' equity 24,086 20,103 36,789
- ------------------------------------------------------------------------------------------------------------------------------
Total average liabilities and equity $ 254,201 $ 295,294 $ 380,961
==============================================================================================================================
NET INTEREST INCOME/NET INTEREST MARGIN $ 14,437 6.15% $ 15,868 5.68%
==============================================================================================================================
<CAPTION>
- ----------------------------------------------------------------------
Years ended December 31, 1993
- ----------------------------------------------------------------------
Income/ Yield/
Expense Rate
- ----------------------------------------------------------------------
<S> <C> <C>
ASSETS
Interest-earning assets:
Loans, net of deferred fees (1) $ 23,190 8.01%
Investment securities 1,916 5.05%
Bank-owned TCD 263 4.66%
Fed funds sold 542 2.94%
- ----------------------------------------------------------------------
Total interest earning assets/interest income 25,911 7.37%
- ----------------------------------------------------------------------
Cash and due from banks
Allowance for loan losses
Premises and equipment
Other assets
- ----------------------------------------------------------------------
Noninterest earning assets
- ----------------------------------------------------------------------
Total average assets
======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW/MMDA $ 1,805 2.73%
Savings 1,052 2.78%
TCDs 5,515 3.88%
- ----------------------------------------------------------------------
Deposits 8,372 3.40%
- ----------------------------------------------------------------------
Notes payable 112 5.87%
Commercial paper 186 2.66%
Fed funds purchased 44 3.20%
Repurchase agreements 285 3.83%
- ----------------------------------------------------------------------
Other interest-bearing liabilities 627 3.54%
- ----------------------------------------------------------------------
Total interest-bearing liabilities/interest
expense 8,999 3.41%
- ----------------------------------------------------------------------
Demand deposits
Other liabilities
- ----------------------------------------------------------------------
Noninterest bearing liabilities
Shareholders' equity
- ----------------------------------------------------------------------
Total average liabilities and equity
======================================================================
NET INTEREST INCOME/NET INTEREST MARGIN $ 16,912 4.81%
======================================================================
</TABLE>
(1) Includes loans on nonaccrual status of approximately $4.3 million, $7.6
million, and $19.3 million at December 31, 1994, and 1993, respectively. The
amount of interest foregone on loans that were on nonaccrual status were
approximately $1.3 million, $1.6 million, and $2.2 million for the years
ended December 31, 1995, 1994, and 1993, respectively. Interest income on
loans includes amortization of net loan fees of approximately $139 thousand,
$237 thousand, and $77 thousand for the years ended December 31, 1995, 1994,
and 1993, respectively.
The Company's primary source of revenue is net interest income, which is the
difference between the interest and fees earned on loans and investments and the
interest paid on deposits and other funds. The Company's net interest income is
affected by changes in the amount and mix of interest on interest-earning assets
and interest-bearing liabilities and by changes in yields earned on interest-
earning assets and rates paid on interest-bearing liabilities. The table below
sets forth, for the periods indicated, a summary of the changes in interest
income and interest expense resulting from changes in average interest rates
(rate) and changes in average asset and liability balances (volume). The change
in interest due to both rate and volume has been allocated to change due to rate
and volume in proportion to the relationship of absolute dollar amounts in each.
Nonaccrual loans are included in average loan balances.
9
<PAGE>
<TABLE>
<CAPTION>
1995 and 1994 1994 and 1993
Increase (decrease) Increase (decrease)
due to change in due to change in
Rate Volume Net Change Rate Volume Net Change
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans, net of deferred fees $ 2,973 $ (5,338) $ (2,365) $ 2,412 $ (6,861) $ (4,449)
Investment securities 85 332 417 262 (11) 251
Bank-owned TCD 3 (49) (46) 26 (221) (195)
Fed funds sold 378 278 656 264 354 618
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets/interest income 3,439 (4,777) (1,338) 2,964 (6,739) $ 3,775
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW/MMDA (13) (137) (150) (52) (213) (265)
Savings (6) (162) (168) (152) (78) (230)
TCDs 1,463 (1,041) 422 (236) (1,388) (1,624)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Deposits 1,444 (1,340) 104 (440) (1,679) (2,119)
- ---------------------------------------------------------------------------------------------------------------------------------
Notes payable (2) (3) (5) 25 (128) (103)
Commercial paper - - - (186) - (186)
Fed funds purchased (1) - (1) (13) (30) (43)
Repurchase agreements (5) - (5) 4 (284) (280)
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities/interest expense 1,436 (1,343) 93 (610) (2,121) (2,731)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME/NET INTEREST MARGIN $ 2,003 $ (3,434) $ (1,431) $ 3,574 $ (4,618) $ (1,044)
=================================================================================================================================
</TABLE>
Net interest income decreased by $1.4 million, or 9.0%, to $14.4 million during
1995 compared to 1994, primarily due to a significant decrease in average
interest earning assets. This decrease reflects overall balance sheet shrinkage
to improve liquidity, as well as to achieve compliance with the capital
requirements of the Banks' regulatory agreements. The decrease is partially
offset by a higher net interest margin during 1995, due to changes in interest
bearing liabilities, the reduction in nonperforming assets and higher market
interest rates.
Interest income decreased $1.3 million to $20.8 million for the year ended
December 31, 1995. The decrease in interest income was primarily attributable
to a significant decrease in interest earning assets, principally loans.
However, the net interest margin increased 0.47% and yields on average earning
assets increased 0.88%. The increased yields resulted in part from the overall
increase in market rates during 1995, together with changes in the Company's
asset mix, and the reduction in nonperforming assets.
Average interest earning assets were $234.9 million during 1995, a 15.4%
decrease from average earning assets of $277.6 million for 1994. The Company
reduced average interest earning assets to fund a planned reduction of volatile
deposits, particularly title and escrow demand deposits, and institutional
certificates of deposit. Average interest earning assets as a percent of total
average assets decreased from 94.0% to 92.41% for the years ended December 31,
1995, and 1994, respectively.
Average balances for loans, the largest and highest yielding component of
earning assets, decreased 24.6% during 1995. Loan yields increased by 1.40%
reflecting a decrease in nonaccrual loans, and higher yields on new loans and
repricing loans.
Average investment securities increased $5.6 million to $43.3 million for the
year ended December 31, 1995, and average yields increased 0.22% largely because
of the yield curve inversion noted during 1995.
Average balances for federal funds sold and average yields increased $4.8
million and 1.43% to $31.3 million and 5.80% for the year ended December 31,
1995. Management noted the inversion of the yield curve at midyear and was able
to maintain relatively high balances invested in federal funds sold through the
remainder of 1995.
10
<PAGE>
Interest expense increased $100 thousand to $6.4 million from $6.3 million for
the years ended December 31, 1995, and 1994, respectively. The increase in
interest expense was primarily attributable to an increase in the Company's
average cost of funds on interest-bearing deposits to 3.85% during 1995 from
3.17% due primarily to rising market interest rates.
The increase in the cost of funds was offset by a 16.4% decrease in average
interest bearing deposits from $197.4 million to $164.9 million for the years
ended December 31, 1995, and 1994, respectively. Average deposits decreased
from $272.9 million to $227.9 million for the years ended December 31, 1995, and
1994, respectively, a decrease of 16.5%. During 1995, within the TCD category,
approximately $12.3 million or 55% of the institutional TCDs were replaced by
local market area customer TCDs.
Average deposits were $227.9 million, $272.9 million, and $333.5 million, for
the years ended December 31, 1995, 1994, and 1993, respectively. The 18.2% and
16.5% decreases in average deposits from 1993 to 1994 and from 1994 to 1995,
respectively, were due to the planned run-off of title and escrow demand
deposits, and institutional and brokered certificates of deposit designed to
improve the Banks' core deposit bases and reduce potentially volatile
liabilities, offset by increases in December 1995 that resulted from marketing
programs designed to improve the public's perception of the Banks, enhance
business development, generate core deposit growth and a renewed expansion of
total banking relationships.
Average interest-bearing deposits decreased 16.4% to $164.9 million from $197.4
million for the years ended December 31, 1995, and 1994. Average balances for
interest -bearing demand and savings accounts decreased $5.2 million and $6.9
million to $52.9 million and $27.7 million for the year ended December 31, 1995,
from the run-off of escrow and title company accounts. Rates on these deposits
remained relatively constant for the year ended December 31, 1995. Average
balances for time certificates of deposits decreased $20.4 million to $84.3
million from $104.7 million for the years ended December 31, 1995, and 1994,
respectively. This decrease which accounts for the largest percentage of the
overall decrease on average deposits consists principally of institutional time
certificates of deposit that the Company successfully reduced during 1995.
Rates on average time deposits, which comprised 37.0% of average total deposits
for 1995, increased 37.6% to 5.12% from 3.72% for the years ended December 31,
1995, and 1994, respectively. This increase was primarily a result of the
higher market rates.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Rate Sensitive Assets/Rate Sensitive Liabilities".
Provision For Loan Losses
For the years ended December 31, 1995, and 1994, the provision for loan losses
was $410 thousand and $3.8 million, respectively. Net loan charge-offs were $3.3
million and $9.9 million, or 2.05% and 4.66% of average loans and leases,
respectively. Of the 1994 charge-offs, $5.0 million are attributable to the bulk
loan sale which occurred in May 1994. The reduction of loan loss provision from
1994 to 1995 is due to the continuing improvement in the Company's credit
quality.
11
<PAGE>
The following table summarizes the Company's loan loss reserves and loan loss
experience for the years indicated:
<TABLE>
<CAPTION>
for the years ended December 31, 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 8,261 $14,313 $ 3,854 $ 2,845 $2,285
Charge-offs
Commercial, financial and agricultural 2,812 8,705 4,026 1,818 1,696
Real estate construction 151 603 67 -- 100
Real estate mortgage 339 254 1,476 -- --
Installment 295 808 570 722 243
Lease financing 64 69 52 3 29
----------------------------------------------
Total charge-offs 3,661 10,439(1) 6,191 2,543 2,068
Recoveries
Commercial, financial and agricultural 338 428 409 111 56
Real estate construction -- -- -- -- --
Real estate mortgage 1 4 1 -- --
Installment 52 117 16 38 35
Lease financing -- 13 11 -- --
----------------------------------------------
Total recoveries 391 562 437 148 91
Net charge-offs 3,270 9,877 5,754 2,395 1,977
Provision charged to operations 410 3,825 16,213 3,404 2,537
----------------------------------------------
Balance at end of period $ 5,401 $8,261 $14,313 $ 3,854 $2,845
==============================================
</TABLE>
<TABLE>
<CAPTION>
for the years ended December 31, 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ratio of net charge-offs to average loans outstanding 2.05% 4.66% 1.99% 0.76% 0.68%
Loan loss reserves to nonperforming loans(2) 121.62 103.98 72.15 118.44 30.09
Loan loss reserves to nonperforming assets(2) 67.33 73.96 64.86 53.57 24.78
Classified assets to loan loss reserve plus shareholders' equity 44.44 113.27 186.27 84.71 67.45
</TABLE>
______________________________
(1) Of this amount, $5.0 million was attributable to the bulk loan sale
completed in May 1994.
(2) Does not include $3.3 million and $2.0 million of TDRs that were
performing at December 31, 1995 and 1994, respectively.
Noninterest income
Noninterest income decreased $1.8 million, or 44.7%, for the year ended December
31, 1995. However, noninterest income for the year ended December 31, 1994,
included one-time gains for the sales of the Company's mortgage servicing rights
and merchant credit card operations of $1.4 million and $174 thousand,
respectively. As adjusted for these one-time gains, noninterest income
decreased $200 thousand for the year ended December 31, 1995. This adjusted net
decrease is partially offset by increased gains on the sale of SBA loans of
$400 thousand realized during 1995. Service charges on deposit accounts
decreased by $250 thousand or 20.5% during 1995 primarily as a result of the
16.5% reduction in average deposits. Loan fees, which are comprised of late
charges and other service fees related to the Company's credit products,
decreased $347 thousand to $123 thousand for the year ended December 31, 1995,
from the sale of the mortgage servicing rights. The sale of the merchant credit
card operations in 1994 resulted in a $42 thousand reduction in fee income
during 1995, which is reported with miscellaneous fee income. The reduction in
mortgage servicing and merchant credit card activity led to a corresponding
decrease in noninterest expenses.
Noninterest income in the future is anticipated to be lower due to the
discontinuance of mortgage activities. Combined net mortgage servicing fees and
gains on sale of mortgage loans included in total noninterest income were $589
thousand and $1.7 million for the years ended December 31, 1994, and 1993,
respectively; no fee income from mortgage servicing was reported for the year
ended December 31, 1995.
12
<PAGE>
Noninterest expense
The following table sets forth the Company's noninterest expense for the periods
indicated:
<TABLE>
<CAPTION>
for the years ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Salaries and employee benefits $ 6,861 $ 6,423 $ 7,082
Net occupancy 1,719 2,087 2,578
Equipment 670 830 1,241
Professional services 1,618 1,928 1,878
Real Estate Owned 169 641 1,733
Amortization of goodwill -- -- 1,266
Courier services 275 280 255
Office supplies and office expense 513 612 800
FDIC/OCC assessments 698 996 1,053
Business development and advertising 518 364 271
Other 1,896 1,923 2,682
---------------------------------------
Total Noninterest Expense $14,937 $16,084 $20,839
=======================================
</TABLE>
Noninterest expense decreased $1.1 million or 7.1%, in 1995, due primarily to
decreases in REO expenses, occupancy and equipment expenses, professional
services and FDIC/OCC assessments, partially offset by increases in salaries and
employee benefit expenses. Total noninterest expense expressed as a percentage
of net interest income plus other income, commonly referred to as the efficiency
ratio, was 89.53% and 80.71% for the years ended December 31, 1995, and 1994,
respectively.
Salary and employee benefit expense increased by $438 thousand, or 6.8%, during
1995, primarily as a result of increases in ESOP expenses and a decrease in loan
origination costs. ESOP expenses in 1995 totaled $547 thousand due to
compensation expense recorded for contributions made. As a result, the Trustee
of the ESOP paid off the loan to the Company and all of the shares previously
held in the suspense account, which totalled 185,840 shares as of December 31,
1994, were released to the eligible plan participants. Therefore, as of
December 31, 1995, there is no longer any requirement for the Company to
contribute to the ESOP, and there is no longer any loan outstanding between the
Company and the ESOP. No ESOP contributions were made in 1994. The Company also
adopted Statement of Position ("SOP") 93-6 in 1994 which provided for future
ESOP contributions to be expensed at fair market value of the Common Stock at
the time of the contribution, rather than the historical cost of $9.00 per
share. The expense recorded is based on the average market value of the stock
during the year. Deferred loan origination costs decreased as a result of
decreases in the number of loan originations from 1994 to 1995, which is
evidenced by lower average loan balances during the respective years, and a
decrease in the origination cost recorded per loan as a result of a cost
analysis performed during 1995. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 91, the Company defers loan origination costs
and amortizes them into loan interest income over the life of each loan. These
deferred costs were $142 thousand and $207 thousand as of December 31, 1995, and
1994, respectively. These increases during 1995 are offset by decreases in
salary expenses and other employee benefits due to staff reductions, as total
full time equivalent employees declined from 141 at December 31, 1994, to 127 at
December 31, 1995.
Occupancy expense decreased $368 thousand, or 17.6%, during 1995, as a result of
a decrease in amortization on leasehold improvements, lower rent expenses and an
increase in sublease income, offset by an inventory adjustment to premises and
equipment. During 1994 and 1995, the Company sublet or terminated leases for
office space formerly housing its commercial lending department, mortgage
origination department and administrative personnel, along with the Wilmington
branch location. The Company also negotiated a favorable renewal of the lease
for its Central Operations office, and allowed the lease for one of its
properties to expire during 1995. Equipment expense decreased $160 thousand, or
19.3%, during 1995, primarily due to a significant decrease in depreciation
expense due to the decline in fixed asset additions during 1995 and in computer
maintenance expenses associated with outsourcing of the data processing
operations in 1994.
Professional services expense decreased $310 thousand, or 16.1%, during 1995, as
a result of a decrease in the legal fees related to the settlement and
collection of problem loans, as evidenced by the Company's significant reduction
in nonperforming and classified assets, and the reversal of legal fees incurred
during 1995 that were related to and offset against a legal settlement.
FDIC/OCC assessments decreased $298 thousand or 29.9%, during 1995,
13
<PAGE>
primarily due to a reduction in the semi-annual BIF insurance assessment
percentage and a decrease in average deposits from 1994 to 1995, as the premium
is determined as a percentage of FDIC adjusted deposit balances.
REO expense declined $472 thousand during 1995. REO expense resulting from fair
value adjustments to the REO properties was $263 thousand for the year ended
December 31, 1995, rather than $959 thousand for the year ended December 31,
1994. The reduction in fair value adjustments reflects a stabilization in the
market for distressed properties. When a property is taken into REO, if the fair
value of the property is less than the Company's recorded loans plus estimated
selling costs, a writedown is taken immediately and charged to the loan loss
reserve. Subsequent reductions in fair value based on appraisals are charged to
noninterest expense as writedowns. In addition, REO maintenance expenses were
$263 thousand as compared to $193 thousand for the years ended December 31,
1995, and 1994, respectively. This increase resulted primarily from a change in
the composition of REO properties held during 1995 towards commercial rental
properties. These writedowns and expenses were partially offset by gains on sale
of REO of $358 thousand and $511 thousand for the years ended December 31, 1995,
and 1994, respectively.
Income Taxes
The Company recorded an income tax benefit of $2.4 million for the year ended
December 31, 1995, resulting primarily from the reversal of valuation allowances
that had been established against deferred tax assets in prior years to fully
offset net deferred tax assets. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income. Management considers projected future taxable income and tax
planning strategies in making this assessment. The necessity for the valuation
allowance was reassessed during 1995 and the valuation allowance was reversed,
resulting in income recognition.
Income tax expense of $285 thousand was recorded for the year ended December 31,
1994, reflecting the charge taken to increase the tax valuation allowance in
accordance with the provisions of SFAS No. 109 and to reflect the filing of the
Company's 1993 tax returns. The Company had current tax assets of $1.5 million
at December 31, 1995, representing the remaining benefit from the 1994 and 1995
net operating loss carrybacks to 1992 and other refundable taxes. In addition,
the Company had a net deferred tax asset of $1.4 million, which resulted
primarily from timing differences in the deduction of bad debts between the
financial statements and the tax return.
1994 COMPARED WITH 1993
Net Interest Income and Net Interest Margin
Net interest income decreased by $1.0 million, or 6.2%, to $15.9 million for the
year ended December 31, 1994, compared to $16.9 million for the year ended
December 31, 1993, primarily due to a significant decrease in average interest
earning assets. These decreases reflect overall balance sheet shrinkage,
beginning in 1993, to improve liquidity as well as to achieve compliance with
the capital requirements of the Banks' regulatory agreements.
Interest income for 1994 decreased $3.8 million, or 14.6%, compared to $22.1
million in 1993, while interest expense decreased $2.7 million, or 30.4%, for
the same period to $6.3 million. The decrease in interest income during 1994 was
primarily attributable to a significant decrease in interest earning assets,
primarily loans. The decrease in interest income was slightly offset by an
increase in the yield on interest earning assets to 7.97% for 1994 versus a
7.37% yield on interest earning assets for 1993, which reflects increases in
market interest rates beginning in 1994 and a change in the mix of assets due to
the declining asset base.
Average interest earning assets were $277.6 million during 1994, a 21.1%
decrease from the average balance of $351.7 million for 1993. The Company
reduced average interest earning assets to fund a planned reduction of volatile
deposits, particularly title and escrow deposits and institutional certificates
of deposit. Average interest earning assets as a percent of total average assets
increased from 92.3% for 1993 to 94.0% for 1994. Loans, the largest and highest
yielding component of earning assets, decreased 26.8% during 1994.
The decrease in interest expense during 1994 was primarily attributable to a
19.8% decrease in average interest bearing deposits from $246.1 million for 1993
to $197.4 million for 1995. In addition, the decrease in interest expense was
affected by a change in the mix of interest-bearing liabilities. Average
noninterest-bearing deposits as a percent of total average deposits increased
from 26.2% for 1993 to 27.7% for 1994. Average deposits decreased from $333.5
million for 1993 to $272.9 million for 1994, a decrease of 18.2%. Average
certificates of deposit
14
<PAGE>
greater than $100 thousand decreased from 16.27% of average total deposits for
1993 to 12.34% of average total deposits for 1994. As a result of the shift in
the mix of liabilities, the average cost of funds declined to 3.17% during 1994
compared to a 3.41% cost of funds for 1993, despite increases in market interest
rates.
Net interest margin increased to 5.68% from 4.81% for the years ended December
31, 1994 and 1993, respectively. Most of the increase resulted from the
reduction in non-performing assets and higher market interest rates, which was
partially offset by a decrease in average earning assets, primarily loans.
Noninterest income
Noninterest income decreased $756 thousand, or 15.7%, during 1994, primarily due
to a lower level of mortgage activity. Loan fees decreased 60.6% from $1.2
million in 1993 to $470 thousand in 1994, reflecting a significant decrease in
income resulting from mortgage loan originations and servicing during the year.
Net mortgage servicing fees were $317 thousand in 1994, compared with $618
thousand in 1993, a decrease of 48.7%. The Company sold its mortgage servicing
rights for a net gain of $1.4 million in May 1994, which was offset by a write-
off of $320 thousand. The Company also sold its mortgage origination unit in
June 1994 in return for residual income on future loan originations by the
acquirer. However, due to significant reductions in mortgage origination
activity subsequent to the sale, the acquirer closed the mortgage origination
unit, and no residual income will be generated. Noninterest income increased in
1994, due to the gain on sale of mortgage servicing and a gain of $174 thousand
on the sale of the merchant credit card operation in March 1994. These
increases were offset by a 21.0% decrease in gains on the sale of SBA loans
during 1994. The decreases in gains on sale of SBA loans were due primarily to
reduced volume of sales and the deferral of income recognition due to the timing
of such sales. Service charges on deposit accounts decreased during 1994 as a
result of customers maintaining higher average balances to offset service charge
assessments and lower deposit levels.
Miscellaneous fee income decreased 40.0% from $590 thousand in 1993 to $354
thousand in 1994 due to the elimination of the merchant card portfolio during
1994 and certain other recordkeeping services for customers during 1993 and
1994. Miscellaneous fees include merchant card income, cash management service
charges, safe deposit box rentals, charges for items such as money orders,
cashiers' checks and ATM transactions, and reflect usage and transaction volume.
Merchant card income represented 13.0% and 24.9% of total miscellaneous fees
during 1994 and 1993, respectively.
Noninterest income in the future is anticipated to be lower due to the
discontinuance of mortgage activities. Combined net mortgage servicing fees and
gains on sale of mortgage loans included in total noninterest income were $589
thousand and $1.7 million in 1994 and 1993, respectively.
Provision For Loan Losses and Nonperforming Loans
In 1994 and 1993, the provision for loan losses was $3.8 million and $16.2
million, respectively. Net loan charge-offs in 1994 and 1993 were $9.9 million
and $5.8 million, respectively, or 4.66% and 1.99% of average loans and leases,
respectively. Of the 1994 charge-offs, $5.0 million are attributable to the bulk
loan sale which occurred in May 1994. The reduction of loan loss provision from
1993 to 1994 is due to a significant decline in the migration of loans to
nonaccrual status or REO during 1994.
At December 31, 1994, the loan loss reserve decreased to $8.3 million compared
to $14.3 million at December 31, 1993. The ratio of the loan loss reserves to
outstanding loans and leases at December 31, 1994, and 1993 was 4.92% and 5.35%,
respectively.
The coverage ratio, or the ratio of loan loss reserves to nonperforming loans,
was 103.98% and 72.15%, at December 31, 1994 and 1993, respectively. Loans past
due 90 days or more and still accruing totaled $331 thousand and $552 thousand
at December 31, 1994, and 1993, respectively.
At December 31, 1994, loans totaling $7.6 million were on nonaccrual status,
compared with $18.9 million at December 31, 1993. As of December 31, 1994, the
Company had restructured loans in the amount of $2 thousand, compared to $348
thousand at December 31, 1993.
Total nonperforming loans as a percent of total loans outstanding were 4.73% and
7.41% at December 31, 1994 and 1993, respectively.
15
<PAGE>
Noninterest expense
Noninterest expense decreased $4.8 million, or 22.8%, in 1994, due primarily to
a decrease in REO expense, the write-off of goodwill during 1993, and decreased
salaries and employee benefits, occupancy and equipment expenses. Total
noninterest expense expressed as a percentage of net interest income plus other
income, commonly referred to as the efficiency ratio, was 80.71% for 1994 and
95.89% for 1993.
REO expense declined $1.1 million during 1994. The Company incurred writedowns
on REO of $1.4 million during 1993 due to declining market values on properties
that were principally raw land and commercial real estate. REO writedowns in
1994 totaled $959 thousand. These writedowns were partially offset by gains on
sale of REO of $1 thousand in 1993 and $511 thousand in 1994.
Salary and employee benefit expense decreased by $659 thousand, or 9.3%, during
1994 primarily as a result of staff reductions. Total full time equivalent
employees declined from 199 at December 31, 1993 to 141 at December 31, 1994.
The decrease in employee benefits expense during 1994 reflected reduced employee
health benefits and the savings of $635 thousand compensation expense related to
the ESOP, which was partially offset by $49 thousand in 401(k) matching
contributions. These salary and employee benefit expense reductions were
partially offset by decreased deferred loan origination costs. These deferred
costs were $457 thousand and $207 thousand as of December 31, 1994, and 1993,
respectively.
Occupancy expense decreased $491 thousand, or 19.0%, during 1994, as a result of
a decrease in amortization expense related to leased space and an increase in
income from subleases. During 1993 and 1994, the Company sublet or terminated
leases for office space formerly housing its commercial lending department,
mortgage origination department and administrative personnel. Equipment expense
decreased $411 thousand, or 33.1%, during 1994, primarily due to a significant
decrease in depreciation expense. The Company outsourced its data processing in
May 1994 with monthly cost savings of approximately $52 thousand. The Company
outsourced its courier service in September 1993, resulting in monthly
reductions of approximately $8 thousand.
Income Taxes
The Company recorded income tax expense of $285 thousand in 1994. The charge of
$285 thousand was taken to increase the tax valuation allowance in accordance
with the provisions of SFAS No. 109 and to reflect the filing of the Company's
1993 tax returns. The Company recorded an income tax benefit of $3.2 million in
1993, reflecting available carryback to tax years 1990 through 1992. The Company
had a tax asset of $794 thousand at December 31, 1994, representing the
remaining benefit from the 1994 net operating loss carryback to 1992 and other
refundable taxes. In addition, the Company had a net deferred tax asset of $3.1
million which was fully offset by a tax valuation allowance.
INFLATION
The assets and liabilities of the Company, except for fixed assets, are
virtually all monetary items. Since the Company maintains a small portion of
its total assets in fixed assets, 0.9% at December 31, 1995, and 0.7% at
December 31, 1994, respectively, the potential for inflated earnings resulting
from understated depreciation charges is minimal. High inflation rates could
impact other expense items, such as salaries and occupancy expense.
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
Liquidity management for banks requires that funds be available to pay all
deposit withdrawals and maturing financial obligations and meet credit funding
requirements promptly and fully in accordance with their terms. Over a very
short time frame, for most banks, including the Banks, maturing assets provide
only a limited portion of the funds required to pay maturing liabilities. The
balance of the funds required is provided by liquid assets and the acquisition
of additional liabilities, making liability management integral to liquidity
management in the short term.
The Banks maintain levels of liquidity that they consider adequate to meet their
current needs. The Banks' principal sources of cash include incoming deposits,
the repayment of loans and conversion of investment securities. When cash
requirements increase faster than cash is generated, either through increased
loan demand or withdrawal of deposited funds, the Banks can arrange for the sale
of loan participations and liquidate investments and access their federal funds
lines of credit with correspondent banks or other lines of credit with federal
agencies. Ventura and Frontier have credit lines, for $8 million and $3
million, respectively, with an unaffiliated financial institution which enable
them to borrow federal funds on an unsecured basis. In addition, the Banks have
available lines of credit with the Federal Home Loan Bank of San Francisco equal
to 15% of Ventura's assets and 10% of Frontier's assets
16
<PAGE>
which enable them to borrow funds on a secured basis. At December 31, 1995, the
Banks were not obligated to any entity in connection with their federal funds
lines of credit.
Management of the Company has set a minimum liquidity level of 20% as a target.
The Company's average liquid assets (cash and cash equivalents, federal funds
sold, interest bearing deposits with other financial institutions and investment
securities available for sale, less securities pledged as collateral and
outgoing cash letters) as a percentage of average assets of the Company during
1995, 1994, and 1993 was 23.3%, 18.6% and 13.6%, respectively. Average
liquidity for 1995, 1994, and 1993, expressed as a percent of average
liabilities, was 25.7%, 20.0%, and 16.6%, respectively. From 1993 to 1995, the
Company underwent significant balance sheet restructuring, as evidenced by the
substantial reductions in assets, loans, and deposits, which accounts for the
improved liquidity. The loan to deposit ratios for the Company at December 31,
1995, 1994, and 1993 were 64.5%, 67.6% and 79.6%, respectively.
Although the Banks do not currently purchase brokered deposits, in the past,
both Ventura and Frontier have, to a certain degree, funded growth in their
assets through demand deposits of title and escrow companies and by the issuance
of certificates of deposit to persons, including other financial institutions,
not otherwise having banking relationships with the Banks. Such liabilities are
potentially unstable sources of deposits because they are generally attracted to
the financial institution based primarily upon the interest rate paid by the
institution and the general financial condition of the institution and may be
withdrawn on relatively short notice. Furthermore, the proceeds of such
liabilities are generally invested in relatively low yielding short term
investment securities rather than higher yielding loans. In order to stabilize
its funding sources, the Company has taken action to reduce title and escrow
deposits and institutional deposits as a percentage of total deposits. Demand
deposits owned by title and escrow companies represented 0.1%, 1.2% and 11.3% of
total deposits at December 31, 1995, 1994, and 1993, respectively.
Certificates of deposit held by other financial institutions represented 4.2%,
9.4%, and 11.4% of total deposits at December 31, 1995, 1994, and 1993,
respectively, and brokered CDs represented 1.3% of total deposits at December
31, 1993; the Company did not have any brokered CDs at December 31, 1995, or
1994.
Although liability management is the key to liquidity management in the short-
term, long-term planning of both assets and liabilities is necessary to manage
net yields. To the extent maturities of assets and liabilities do not match in
a changing rate environment, net yields may be affected.
Parent is a legal entity, separate and distinct from its subsidiaries, and it
must separately meet its liquidity needs. Aside from raising capital on its
own behalf or borrowing from outside sources, Parent may receive additional
funds through dividends paid by, and fees from services provided to its
subsidiaries. Future cash dividends paid to Parent by its subsidiaries will
depend on each subsidiary's future profitability, capital requirements,
restrictions imposed by regulatory agreements and other factors. See "Market
Price of Common Stock and Dividends" and "Risk Factors--Dividend Restrictions."
In addition, the Formal Agreement required the Parent to reimburse Ventura for
$3.3 million in connection with interest paid to Parent on deposits of funds
generated by commercial paper sales. The reimbursement was made during 1995.
See "Risk Factors--Regulatory Agreements and Capital Requirements."
During 1995, Parent paid off notes payable in the amount of $125 thousand with
proceeds from the rights offering and had no notes payable outstanding as of
December 31, 1995. Parent has sufficient cash available to meet its obligations
during 1996.
RATE SENSITIVE ASSETS/RATE SENSITIVE LIABILITIES
The objective of asset/liability management is to provide stable growth in net
interest income while minimizing the impact on earnings due to changes in
interest rates. To reduce exposures to interest rate fluctuations, the Company
attempts to match its interest sensitive assets with its interest sensitive
liabilities, and maintain the maturity and repricing of these assets and
liabilities at appropriate levels. Rate sensitive assets and liabilities are
those instruments on which interest rates can be adjusted within a short period
of time. In recent years, assets and liabilities have become more interest rate
sensitive as a result of deregulation and increased volatility in interest
rates.
17
<PAGE>
One method the Company uses to monitor interest rate sensitivity is by
attempting to match rate sensitive assets to rate sensitive liabilities over
several time periods by using what is called GAP analysis. Set forth in the
table below is the interest rate sensitivity or GAP position of the Company at
December 31, 1995.
<TABLE>
<CAPTION>
OVER
LESS ONE YEAR OVER
THAN ONE THROUGH FIVE NONINTEREST
YEAR FIVE YEARS YEARS BEARING TOTAL
- -----------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ -- $ -- $ -- $19,920 $ 19,920
Interest-bearing deposits with other financial
institutions 100 -- -- -- 100
Federal funds sold 47,450 -- -- -- 47,450
Securities available-for-sale 11,674 17,572 7,492 -- 36,738 (1)
Loans, net fixed rate 14,027 19,255 6,341 -- 39,623
Loans, net floating rate 113,882 -- -- 4,260 118,142
Noninterest bearing assets -- -- -- 11,334 11,334
Less loan loss reserve -- -- -- (5,401) (5,401)
--------------------------------------------------------------
Total assets $187,133 $36,827 $13,833 $30,113 $267,906
==============================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest bearing deposits $ -- $ -- $ -- $68,074 $68,074
Interest-bearing demand and savings deposits 77,085 -- -- -- 77,085
Time certificates of deposit 84,171 6,742 -- -- 90,913
Other liabilities -- -- -- 2,225 2,225
Shareholders' equity -- -- -- 29,609 29,609 (1)
--------------------------------------------------------------
Total liabilities and shareholders' equity $161,256 $ 6,742 $ -- $ 99,908 $267,906
==============================================================
Interest rate-sensitivity gap $ 25,877 $30,085 $ 13,833
Cumulative interest rate-sensitivity gap 25,877 55,962 69,795
Cumulative interest rate-sensitivity gap
as a percent of total assets 9.7% 20.9% 26.1%
</TABLE>
_____________________________________
(1) Excludes unrealized losses of $150 thousand on securities available
for sale as of December 31, 1995.
At December 31, 1995, the Company had net repriceable assets (a "positive" gap)
as measured at one year of 9.7% of total assets. The net repriceable assets
over a five-year time horizon totaled approximately $56 million or 20.9% of
total assets. A positive gap implies that the Company is asset sensitive, and
therefore subject to a decline in net interest income as interest rates decline.
In a relatively stable interest rate environment that follows a rise in interest
rates, variable rate liabilities will continue to reprice upward while variable
rate assets, particularly those indexed to prime rate, remain relatively
constant, thereby narrowing net interest margin. As interest rates decline,
variable rate assets reprice at lower rates immediately, while the variable rate
liabilities reprice gradually, resulting in a narrowing of the net interest
margin. The 1995 and 1994 results reflect the situation in which the net
interest margin grew as rates increased, whereas, the 1993 results reflect the
opposite situation, with declines in the net interest margin as rates declined.
To measure the earnings impact due to asset sensitivity, the Company has
purchased software to simulate the effect of interest rate changes on the
balance sheet. The Asset/Liability Committees ("ALCO") of the Banks analyze
data produced by this software monthly to determine the most appropriate manner
to counter interest rate risk. Based on the recommendations from ALCO, the
Banks have implemented strategies to counter the impact of changing interest
rates, including the establishment of interest rate floors on 37% of the
variable rate loans at December 31, 1995, to mitigate the effect on the net
interest margin if rates decline, and also by investing in fixed rate investment
securities and increased percentages of fixed rate loans in the portfolio.
Management believes that these strategies are effective in minimizing the impact
on earnings from changes in interest rates. However, no assurances can be given
that this strategy will be successful if market rates decline below the floors
and customers attempt to refinance such loans.
18
<PAGE>
CAPITAL RESOURCES
The FDIC Improvement Act requires that for banks to be considered "well
capitalized", they must maintain a leverage ratio of 5.0%, a Tier 1 capital
ratio of 6.0% and a risk-based capital ratio of 10.0% and not be under a written
agreement or capital directive. Banks will be considered "adequately
capitalized" if they maintain a leverage ratio of 4.0%, a Tier 1 risk-based
capital ratio of 4.0%, and a total risk-based capital ratio of 8.0%. The
Consent Order requires Frontier to maintain capital ratios at levels
substantially higher than the levels generally applicable to other national
banks. Frontier is required to maintain a Tier 1 risk-based capital ratio of
9.50% and a leverage capital ratio of 7.00%. See "Supervision and Regulation--
Potential and Existing Enforcement Actions". Tier 1 capital consists primarily
of common stock, retained earnings and perpetual preferred stock, less goodwill
and other ineligible items. Tier 2 capital is comprised of limited life
preferred stock, subordinated debt and loan loss reserves limited to 1.25% of
total risk weighted assets. Total risk-based capital is Tier 1 plus Tier 2
capital; however, at least 50% of total capital must be comprised of Tier 1
capital. The capital standards specify that assets, including certain off-
balance items be assigned risk weights based on credit and liquidity risk which
range from 0% risk weight for cash to 100% risk weight for commercial loans and
certain other assets. The leverage ratio is Tier 1 capital to adjusted average
assets. The Tier 1 capital ratio is Tier 1 capital to risk weighted assets. The
total risk-based capital ratio is Tier 1 plus Tier 2 capital to risk weighted
assets. The following sets forth the capital ratios for the Company and the
Banks at December 31, 1995, and 1994.
<TABLE>
<CAPTION>
as of December 31, 1995 1994
- -------------------------------------------------------------
<S> <C> <C>
Company (1)
Risk-based Capital Ratio 18.83% 12.61%
Tier 1 Capital Ratio 17.56% 11.32%
Leverage Ratio 11.40% 7.53%
Ventura
Risk-based Capital Ratio 17.25% 12.21%
Tier 1 Capital Ratio 15.97% 10.92%
Leverage Ratio 10.03% 7.21%
Frontier (1)
Risk-based Capital Ratio 15.04% 13.57%
Tier 1 Capital Ratio 13.78% 12.29%
Leverage Ratio 9.80% 8.32%
</TABLE>
____________
(1) In accordance with recent guidance from the Federal Financial Institutions
Examination Council, regulatory capital includes $548 thousand, which
represents a $792 thousand cumulative effect adjustment to reduce the
balance of SBA loans, a portion of which was offset by income recognized
through amortization and gains on the sales of SBA loans during the 90 day
recourse period pursuant to generally accepted accounting principles. This
amount is not reflected in the accompanying financial statements prepared
in accordance with generally accepted accounting principles.
NEW ACCOUNTING PRONOUNCEMENTS
On January 1,1995, the Company adopted SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." This statement
amends SFAS No. 5, "Accounting for Contingencies" and SFAS No. 15, "Accounting
by Debtors and Creditors for Troubled Debt Restructurings." This statement
prescribes that a loan is impaired when it is probable that the creditor will be
unable to collect all contractual principal and interest payments under the
terms of the loan agreement. This statement generally requires impaired loans
to be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or as an expedient, at the
loan's observable market price or the fair value of the collateral if the loan
is collateral dependent. Creditors may select the measurement method on a loan
by loan basis, except that collateral dependent loans must be measured at the
fair value of the collateral if foreclosure is probable. The statement also
prescribes measuring impairment of a restructured loan by discounting the total
expected future cash flows at the loan's effective rate of interest in the
original loan agreement. The effect of initially adopting this statement is
reported as part of the provision for credit losses. The adoption of SFAS No.
114 and SFAS No. 118 did not have a material impact on the results of operations
or the financial position of the Company taken as a whole.
The Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" as of December 31, 1993. SFAS No. 115 addresses
accounting and reporting for investments in equity securities that
19
<PAGE>
have readily determinable fair values and for all investments in debt
securities. Those investments are to be classified in three categories and
accounted for as follows: (1) debt securities for which the Company has the
positive intent and ability to hold to maturity are classified as held-to-
maturity securities and reported at amortized cost; (2) debt and equity
securities that are bought and held principally for the purpose of selling in
the near term are classified as trading securities and reported at fair value,
with unrealized gains and losses included in earnings; and (3) debt and equity
securities not classified as either held-to-maturity securities or trading
securities are classified as available-for-sale securities and reported at fair
value, with unrealized gains and losses excluded from earnings and reported in a
separate component of shareholders' equity. Accreted discounts and amortized
premiums on investment securities are included as interest income, and
unrealized gains or losses relating to holding or selling securities are
calculated using the specific identification method.
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", which encourages companies to account for stock compensation
awards based on their fair value at the date the awards are granted. This
Statement does not require the application of the fair value method and allows
the continuance of current accounting method, which requires accounting for
stock compensation awards based on their intrinsic value as of the grant date.
However, SFAS No. 123 requires proforma disclosure of net income and, if
presented, earnings per share, as if the fair value based method of accounting
defined in this Statement had been applied. The accounting and disclosure
requirements of this statement are effective for financial statements for fiscal
years beginning after December 15, 1995, though earlier adoption is encouraged.
The Company has elected not to adopt the fair value provisions of this
statement.
20
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
as of December 31, 1995 1994
- -------------------------------------------------------------------------------------------------------------------
(in thousands of dollars)
ASSETS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 19,920 $ 11,442
Federal funds sold 47,450 27,000
Interest-bearing deposits with other financial institutions 100 694
Securities, available for sale at fair value, (amortized cost $36,738
and $32,604, respectively) 36,588 31,859
Securities, held to maturity at amortized cost, (market at
December 31, 1994, $17,963) - 18,775
Loans and leases, net of unearned income 157,765 167,934
Less: loan loss reserve (5,401) (8,261)
- -------------------------------------------------------------------------------------------------------------------
Loans and leases, net 152,364 159,673
Premises and equipment, net 2,371 1,917
Other assets 8,963 6,395
- ------------------------------------------------------------------------------------------------------------------
Total Assets $267,756 $257,755
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
Deposits:
Noninterest bearing demand $ 68,074 $ 67,177
Interest bearing demand and savings 77,085 80,646
Time certificates of deposit 90,913 88,519
- -------------------------------------------------------------------------------------------------------------------
Total deposits 236,072 236,342
Notes payable - 125
Other liabilities 2,225 2,236
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 238,297 238,703
Commitments and contingencies
Shareholders' equity
Contributed capital, including common stock, no par value,
20,000,000 shares authorized; issued and outstanding,
9,226,723 and 6,333,835 at December 31, 1995, and
1994, respectively 37,025 30,949
Unrealized loss on securities, available for sale,
net of tax at December 31, 1995 (615) (1,178)
Retained deficit (6,951) (10,719)
- -----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 29,459 19,052
- -----------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $267,756 $257,755
=================================================================================================================
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
for the years ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Interest Income
Loans and leases $ 16,375 $ 18,740 $ 23,190
Deposits with financial institutions 21 67 263
Investment securities 2,586 2,169 1,916
Federal funds sold 1,816 1,160 542
-------------------------------------------------------------------------------------------------------
Total interest income 20,798 22,136 25,911
Interest Expense
Deposits 6,357 6,253 8,372
Other borrowings 4 15 627
-------------------------------------------------------------------------------------------------------
Total interest expense 6,361 6,268 8,999
-------------------------------------------------------------------------------------------------------
Net Interest Income 14,437 15,868 16,912
Provision for loan losses 410 3,825 16,213
- ------------------------------------------------------------------------------------------------------------
Net Interest Income after Provision for Loan Losses 14,027 12,043 699
Noninterest Income
Service charges on deposit accounts 967 1,217 1,521
Loan servicing fees 123 470 1,192
Miscellaneous fees 308 354 590
Gains (losses) on sales of investment securities 47 (195) 56
Gain on sale of loan servicing rights - 1,443 -
Gains on sales of SBA loans 696 305 386
Other 105 470 1,075
-------------------------------------------------------------------------------------------------------
Total noninterest income 2,246 4,064 4,820
Noninterest Expense
Salaries and employee benefits 6,861 6,423 7,082
Occupancy, net 1,719 2,087 2,578
Equipment 670 830 1,241
REO 169 642 1,733
Goodwill amortization - - 1,266
Professional services 1,618 1,928 1,878
FDIC/OCC assessments 698 996 1,053
Business development and advertising 518 364 271
Office supplies and expense 513 612 800
Courier 275 280 255
Loan workout 579 111 -
Other 1,317 1,811 2,682
-------------------------------------------------------------------------------------------------------
Total noninterest expense 14,937 16,084 20,839
-------------------------------------------------------------------------------------------------------
Income (Loss) before Income Taxes 1,336 23 (15,320)
Provision for income taxes (benefit) (2,432) 285 (3,233)
- ------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 3,768 $ (262) $ (12,087)
============================================================================================================
Per share:
Net income (loss) $ 0.48 $ (0.04) $ (2.14)
</TABLE>
See notes to consolidated financial statements
22
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
SHARES CONTRIBUTED LOSS ON EARNINGS
OUTSTANDING CAPITAL SECURITIES (DEFICIT) TOTAL
----------- ------- ---------- --------- -----
(dollars in thousands, except for shares of stock)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993 5,614,255 $28,884 $ (126) $ 1,630 $ 30,388
Net Loss--1993 -- --- -- (12,087) (12,087)
Increase in unrealized loss on securities -- -- 4 -- 4
Decrease in unearned compensation
related to ESOP -- 635 -- -- 635
Sale of Common Stock 719,580 1,430 -- -- 1,430
--------- ------ ------ ------- ------
Balance at December 31, 1993 6,333,835 30,949 (122) (10,457) 20,370
Net Loss--1994 -- -- -- (262) (262)
Increase in unrealized loss on securities -- -- (1,056) -- (1,056)
--------- ------ ------ ------- ------
Balance at December 31, 1994. 6,333,835 30,949 (1,178) (10,719) 19,052
Stock Options Exercised 4,000 8 -- -- 8
Sale of Common Stock 2,888,888 5,521 -- -- 5,521
Net Income--1995 -- -- -- 3,768 3,768
Decrease in unearned compensation
related to ESOP -- 547 -- -- 547
Decrease in unrealized loss on securities -- -- 563 -- 563
--------- ------- ------- -------- --------
Balance at December 31, 1995 9,226,723 $37,025 $ (615) $ (6,951) $ 29,459
========= ======= ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASHFLOWS
<TABLE>
<CAPTION>
for the years ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)...................................... $3,768 $(262) $(12,087)
Adjustments to reconcile net income (loss) to cash flows
provided by (applied to) operating activities:
Depreciation and amortization......................... 572 739 2,446
Provision for loan losses............................. 410 3,825 16,213
Change in deferred loan fees.......................... (65) (250) (271)
Accretion of investment discount, net of amortization
of investment premium............................... (163) 39 322
(Gain) loss on sale of investment securities
available for sale.................................. (47) 195 -
Gain on sale of investment securities................. - - (56)
Gain on sale of loan servicing rights................. - (1,443) -
Gain on sale of merchant card portfolio............... - (174) -
Gain on sale of SBA loans............................. (696) (305) (386)
(Gain) loss on sale of fixed assets................... 105 (9) (11)
Gain on sale of REO................................... (358) (511) (1)
REO write-downs....................................... 263 959 1,408
Provision for deferred income taxes................... (1,868) 1,200 (1,133)
Change in other assets................................ (811) (4,865) (1,515)
Change in other liabilities........................... (126) 491 (427)
Decrease in deferred compensation related to ESOP..... 547 - 635
-------------------------------------------------
Net Cash Provided by (Applied To) Operating Activities 1,531 (371) 5,137
-------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investment securities.......... - - 44,930
Proceeds from sales of investment securities
available-for-sale.................................... 7,229 8,732
Proceeds from maturities of investment securities...... - - 31,834
Proceeds from maturities of investment securities
held-to-maturity...................................... 2,853 3,466 -
Proceeds from maturities of investment securities
available-for-sale.................................... 14,084 2,625
Purchase of investment securities...................... - - (84,633)
Purchase of investment securities held-to- maturity.... (3,997) (3,194) -
Purchase of investment securities available-for- sale.. (4,883) (22,778) -
Purchase of premises and equipment..................... (1,034) (996) (373)
Proceeds from sale of premises and equipment........... 18 36 366
Proceeds from sale of REO properties................... 1,942 5,345 833
Net change in loans.................................... 11,303 74,364 34,380
Proceeds from the sale of SBA loans.................... 5,574 6,738 5,601
Proceeds from the sale of non-performing loans........ - 9,056 -
Change in Federal funds sold........................... (20,450) (9,000) (18,000)
Change in deposits with other financial institutions... 594 1,486 4,955
Proceeds from sale of loan servicing rights........... - 1,763 -
Proceeds from sale of merchant card portfolio.......... - 174 -
Purchases of bulk loans................................ (11,420) - -
-----------------------------------------------
Net Cash Provided By Investing Activities......... 1,813 77,817 19,893
-----------------------------------------------
</TABLE>
24
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASHFLOWS
<TABLE>
<CAPTION>
for the years ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Change in demand and savings deposits.................... (2,664) (52,903) (6,070)
Change in time deposits.................................. 2,394 (29,044) (24,228)
Change in short-term borrowings.......................... -- -- (16,860)
Issuance of common stock................................. 5,529 -- 1,430
Repayment of note payable................................ (125) -- (2,188)
Issuance of notes payable................................ -- -- 125
-------------------------------------------
Net Cash Provided by (Applied To) Financing Activities.. 5,134 (81,947) (47,791)
-------------------------------------------
Net Increase (Decrease) In Cash and Cash Equivalents.... 8,478 (4,501) (22,761)
-------------------------------------------
Cash and Cash Equivalents at Beginning of Year........... 11,442 15,943 38,704
-------------------------------------------
Cash and Cash Equivalents at End of Year................. $19,920 $ 11,442 $ 15,943
======== ======== =========
SUPPLEMENTAL DISCLOSURES ABOUT CASH FLOWS
AND NONCASH TRANSACTIONS
Interest payments $ 6,295 $ 6,276 $ 9,124
Income taxes paid 188 -- 300
Foreclosures 4,428 6,197 664
Change in unrealized loss on available-
for-sale investment securities (186) 433 --
Loans to facilitate sales of REO 2,225 -- 603
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Ventura County National Bank, a national banking organization (VCNB), was
organized on February 17, 1982, and commenced business on October 25, 1982.
Ventura County National Bancorp (separately "Ventura," and with its subsidiaries
on a consolidated basis, the "Company") was organized and incorporated on
February 22, 1984, for the purpose of becoming a bank holding company by
acquiring all of the outstanding common stock of VCNB. Accordingly, on September
12, 1984, all of the shareholders of VCNB exchanged their common stock for an
equal number of shares of the Company's common stock.
During 1989, the Company acquired all of the outstanding shares of Frontier
Group, Incorporated, the parent holding company of Frontier Bank, N. A., in
exchange for cash. The acquisition was accounted for as a purchase.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation.
The Company's primary operations are related to traditional banking activities,
including the acceptance of deposits and the lending of cash and investing of
money. The Company's customers consist of small to medium-sized businesses and
individuals located primarily in Ventura, Santa Barbara, Orange, and Los Angeles
counties. The Company also originates and sells Small Business Administration
("SBA") loans through its normal operations.
VCNB conducts its banking operations through four branch offices located in
Ventura County, California, approximately 60 miles northwest of downtown Los
Angeles. VCNB's four branch offices are positioned in Ventura, Camarillo,
Oxnard, and Westlake Village. Frontier is based in La Palma in northwestern
Orange County and has a branch office in Wilmington in southern Los Angeles
County. Ventura's headquarters are located in Oxnard, California.
NOTE 2. ACCOUNTING POLICIES
The Company and its subsidiaries follow generally accepted accounting principles
and reporting practices applicable to the banking industry. The preparation of
financial statements in conformity with generally accepted accounting principles
requires the use of management's estimates that affect the reported amounts of
assets and liabilities and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The
following is a summary of the significant accounting and reporting policies used
in preparing the consolidated financial statements.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand and amounts due from banks.
Investment Securities
In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". The Company adopted the provisions
of the new standard in its financial statements as of December 31, 1993.
Investments are classified in three categories and accounted for as follows: 1)
debt securities for which the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and reported at
amortized cost; 2) debt and equity securities that are bought and held
principally for the purpose of selling in the near term are classified as
trading securities and reported at fair value, with unrealized gains and losses
included in earnings; and 3) debt and equity securities not classified as either
held-to-maturity securities or trading securities are classified as available-
for-sale securities and reported at fair value in the Consolidated Balance
Sheets, with unrealized gains and losses excluded from earnings and reported in
a separate component of shareholders' equity, net of tax.
Consistent with the provisions of SFAS No. 115, the Company classified its
investment securities as available for sale upon adoption at December 31, 1993,
and recorded an unrealized loss of $122,000, net of tax effect. No portion of
such unrealized loss was previously recognized in operating results prior to
the adoption of SFAS No. 115. Prior to the adoption of SFAS No. 115, all
investment securities were stated at amotized cost, with the exception of
investments in mutual funds, which were deemed equity investments, with
adjustments to lower of cost
26
<PAGE>
or market being recorded as a component of equity. During 1994 and 1995, the
Company purchased securities which were classified as either available-for-sale
or held-to-maturity categories at the time of purchase, based on management's
intent and ability to hold certain securities to maturity.
Ventura had no trading securities at December 31, 1994, or 1995. Mortgage-backed
securities consist entirely of Federal Home Loan Mortgage Corporation (FHLMC)
securities; there are no structured notes, CMOs, or other derivative products
in the investment portfolio.
Accreted discounts and amortized premiums on all investment securities are
included in interest income, along with dividend and interest income. Unrealized
and realized gains or losses relating to holding or selling securities are
calculated using the specific identification method.
Interest and Fees on Loans
Interest on loans is accrued and credited to operations based on the principal
amount outstanding, except that accruals are normally discontinued whenever
payment of principal or interest is in doubt. When a loan is classified as
nonaccrual, all previously accrued interest is reversed. Loan origination fees
and initial direct costs of loan origination are deferred and amortized over the
life of the loan as an adjustment of yield throughout the life of the related
loan. Such fees and costs related to loans held for sale are deferred and
recognized in income as a component of gain or loss on sale of loans when the
related loans are sold.
SBA Loans and Servicing Income
The portion of loans guaranteed by the SBA, which are originated and are
intended for sale in the secondary market, is carried at the lower of cost or
estimated market value. Funding for SBA programs depends on annual
appropriations by the U.S. Congress, and accordingly, the sale of loans under
this program is dependent on the continuation of such programs.
Gains on sale of the guaranteed portion of SBA loans are recognized to the
extent sales proceeds less amounts necessary to provide required yield
enhancement to the Company for retaining the unguaranteed portion of the loan
exceed the carrying value of the guaranteed portion sold. Gains or losses are
determined using the specific identification method for loans sold and are
recorded as noninterest income as of the date of sale.
The Company sells SBA loans and retains servicing. At the time of the sale, an
evaluation is made of the contractual servicing fee, which is represented by the
differential between the contractual interest rate of the loan and the interest
rate payable to the investor. The present value of the amount by which the
contractual servicing fee exceeds a normal servicing fee, or the Company's cost
of servicing such loans plus a normal profit, whichever is greater, after
evaluation of estimated prepayments on such loans, is considered to be an
adjustment of the sales proceeds, which in turn increases the gain recognized at
the time of the sale. Such gains are only recognized to the extent they do not
exceed the amount deferred as yield enhancement on the unguaranteed portion of
the SBA loan sold. The resultant amount of deferred loan sales proceeds is
amortized using a method which approximates a level yield over the estimated
remaining lives of such loans. The contractual servicing fee is recognized as
income over the lives of the related loans, net of the estimated normal
amortization of the deferred loan sales proceeds. Loan servicing costs are
charged to expense as incurred. When actual loan repayment experience differs
from original estimates, amortization is adjusted accordingly through
operations.
Loan Loss Reserve
The loan loss reserve is maintained at a level believed adequate by management
to absorb potential losses on the loan and lease portfolios. Management's
determination of that adequacy is based on an evaluation of the portfolio, past
loan loss experience, current economic conditions, volume, growth, composition
of the portfolio and other relevant factors. In addition, regulatory authorities
have recently required many California financial institutions to substantially
increase their loan loss reserve in recognition of the inherent risk in the
existing economic environment. Management also considers this factor in
calculating the loan loss reserve.
The reserve is increased by provisions for loan losses charged against income.
Loans and leases are charged against the loan loss reserve when management
determines that collectibility of the principal is unlikely. Recoveries on loans
previously charged off are credited to the reserve. Although management believes
the level of the loan loss reserve as of December 31, 1995, is adequate to
absorb losses inherent in the loan portfolio, additional declines in the local
economy may result in increasing losses that cannot be reasonably predicted at
this time.
27
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On January 1,1995, the Company adopted SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." This statement
amends SFAS No. 5, "Accounting for Contingencies" and SFAS No. 15, "Accounting
by Debtors and Creditors for Troubled Debt Restructurings." This statement
prescribes that a loan is impaired when it is probable that the creditor will be
unable to collect all contractual principal and interest payments under the
terms of the loan agreement. This statement generally requires impaired loans to
be measured based on the present value of expected future cash flows discounted
at the loan's effective interest rate, or as an expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. Creditors may select the measurement method on a loan by
loan basis, except that collateral dependent loans must be measured at the fair
value of the collateral if foreclosure is probable. The statement also
prescribes measuring impairment of a restructured loan by discounting the total
expected future cash flows at the loan's effective rate of interest in the
original loan agreement. The effect of initially adopting this statement is
reported as part of the provision for credit losses. The adoption of SFAS No.
114 and SFAS No. 118 did not have a material impact on the results of operations
or the financial position of the Company taken as a whole.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization computed on a straight-line basis over the estimated useful lives
of the assets or terms of the leases. Net gains and losses on retirement of
disposal of premises are included in net gains on sales of assets.
Real Estate Owned
Real estate acquired through foreclosure or deed-in-lieu-of foreclosure, is
carried at the lower of cost or fair value less estimated costs to sell. At the
time of acquisition, any excess of cost over fair value is charged to the loan
loss reserve. Gains realized on sales and operating income are included in
noninterest income; losses realized on sale, holding expenses and subsequent
declines in fair value are included in noninterest expense, respectively, in the
consolidated statements of operations.
Intangible Assets and Deferred Loan Servicing Fees
For the year ended December 31, 1993, and for the first half 1994, the cost of
acquired loan servicing rights was capitalized and amortized over the estimated
remaining term of the underlying loan pertfolio. During May, 1994, the Company
sold its mortgage loan servicing department and the related capitalized loan
servicing rights were written off.
Income Taxes
Deferred tax assets or liabilities shown on the balance sheet are adjusted to
reflect differences between the tax bases of assets and liabilities and their
reported amounts in the financial statements. The adjustments to deferred tax
assets and liabilities plus income taxes currently payable or refundable
represents the income tax provision for the year.
The parent files consolidated U.S. federal and California state income tax
returns.
Income (Loss) Per Share
Income (loss) per share is computed by dividing net income or (loss) by the
weighted-average number of common shares outstanding and the additional dilutive
effect of stock options outstanding during the period. The dilutive effect of
stock options is computed using the average market price of the Company's common
stock for the period. Shares of Common Stock held by the Trustee of the Employee
Stock Ownership Plan, in suspense as collateral for a loan, are not accounted
for as common stock equivalents until such time as they are released to
participants.
The weighted average number of shares used to compute income per share were
7,833,058, 6,333,835, and 5,635,941 for the years ended December 31, 1995, 1994,
and 1993, respectively. Fully diluted income per share has not been reported for
1995, as the additional dilutive effect of outstanding stock options was
immaterial. Fully diluted per share amounts are not reported in loss years as
such amounts are antidilutive.
28
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Current Accounting Pronouncements
FASB has issued Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation", which encourages companies to account
for stock compensation awards based on their fair value at the date the awards
are granted. This statement does not require the application of the fair value
method and allows the continuance of current accounting method, which requires
accounting for stock compensation awards based on their intrinsic value as of
the grant date. However, SFAS No. 123 requires proforma disclosure of net income
and, if presented, earnings per share, as if the fair value based method of
accounting defined in this Statement had been applied. The accounting and
disclosure requirements of this statement are effective for financial statements
for fiscal years beginning after December 15, 1995, although earlier adoption is
encouraged. The Company has elected not to adopt the fair value provisions of
this statement.
Reclassifications
Certain reclassifications have been made to prior years' amounts to conform to
current year presentation.
NOTE 3. RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Company is required to maintain cash reserve balances on transaction
accounts and non-personal time deposits with the Federal Reserve Bank. These
reserve requirements can be offset by cash balances held at the Company. The
average amount of these reserve balances for the year ended December 31, 1995,
was $1,714,000.
NOTE 4. INVESTMENT SECURITIES
As a result of a temporary decline in the market value of securities-available-
for-sale, the Company recorded unrealized losses totaling $615,000 and
$1,178,000, which are included in shareholders' equity on the consolidated
balance sheets at December 31, 1995, and 1994, respectively. The decline in the
market value of the portfolio reflects the current interest rate environment;
such decline is deemed temporary in nature. Several mortgage-backed securities
with a market value of $16,724,000 and an amortized cost of $17,196,000, at the
time of transfer, were transferred from the available-for-sale to the held-to-
maturity category. Previously recorded unrealized losses with a balance of
$297,000 and $433,000 at December 31, 1995, and 1994, respectively, are included
in shareholders' equity and are being amortized over the securities' remaining
lives.
In November 1995, the Financial Accounting Standards Board ("FASB") issued a
"Guide to Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities: Questions and Answers" (the "Guide"). The Guide
allows for a one time reassessment of the classification of all securities and,
in connection with such reassessment, permits the reclassification of securities
from the held-to-maturity classification to the available-for-sale
classification as of a single date no later than December 31, 1995, without
calling into question management's intent to hold to maturity the remaining
securities classified as held-to-maturity. In December 1995, the Company
transferred its entire portfolio of held-to-maturity securities with an
amortized cost of $20,213,000 to the available-for-sale classification to allow
for greater flexibility in the Company's investment portfolio. The transfer
resulted in an unrealized gain of $186,000, net of the unamortized portion of
unrealized loss recorded when certain securities were transferred from the
available-for-sale to held-to-maturity classification during 1994. This gain
is included in the unrealized gains/losses on available-for-sale securities in a
separate component of shareholders' equity.
FHLB stock of $821,000 at December 31, 1995, is not deemed a marketable equity
security, as it is not traded on a registered security exchange, and is carried
at cost. Securities with a fair value of $9,568,000, on December 31,1995, were
pledged as required by law.
29
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost basis, gross unrealized holding gains and losses and
estimated market values of securities at December 31, 1995, were as follows:
<TABLE>
<CAPTION>
SECURITIES AVAILABLE-FOR-SALE
--------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING MARKET
December 31, 1995 COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government securities $ 13,491 $ 85 $ 1 $ 13,575
Mortgage-backed securities 21,882 230 464 21,648
Federal Reserve Bank and FHLB Stock 1,365 -- -- 1,365
-------------------------------------
Total $ 36,738 $ 315 $ 465 $ 36,588
=====================================
</TABLE>
FHLB stock of $1,067,000 at December 31, 1994, is not deemed a marketable equity
security, as it is not traded on a registered security exchange, and is carried
at cost. Securities held-to-maturity carried at amortized cost of approximately
$4,390,000, and with a fair value of $4,264,000, on December 31, 1994, were
pledged as required by law.
The amortized cost, gross unrealized holding gains and losses and estimated
market values of securities at December 31, 1994, are as follows:
<TABLE>
<CAPTION>
SECURITIES AVAILABLE-FOR-SALE
--------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING MARKET
December 31, 1994 COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government securities $ 22,935 $ -- $ 229 $ 22,706
Mortgage-backed securities 8,067 -- 516 7,551
Federal Reserve Bank and FHLB Stock 1,602 -- -- 1,602
-------------------------------------
Total $ 32,604 $ -- $ 745 $ 31,859
=====================================
<CAPTION>
SECURITIES HELD-TO-MATURITY
--------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING MARKET
December 31, 1994 COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government securities $ 1,205 $ -- $ 28 $ 1,222
Mortgage-backed securities 17,525 -- 784 16,741
-------------------------------------
Total $ 18,775 $ -- $ 812 $ 17,963
=====================================
</TABLE>
30
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1995, the average expected life of mortgage-backed securities
classified as available-for-sale was approximately 3 years, and the average
maturity was approximately 9 years. At December 31, 1995, the scheduled
maturities of debt securities available-for-sale were as follows:
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
---- -----
(dollars in thousands)
<S> <C> <C>
Within one year
U.S. Government Obligations $ 7,493 $ 7,504
After one year through five years
U.S. Government Obligations 5,998 6,071
Mortgage-backed Securities 11,574 11,448
After ten years
Mortgage-backed Securities 10,308 10,200
-----------------------
Total $ 35,373 $ 35,223
=======================
</TABLE>
NOTE 5. LOANS AND LEASES
The following is a summary of the loan and lease portfolio at December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
(dollars in thousands)
<S> <C> <C>
Commercial, financial and agricultural $140,187 $138,193
SBA loans held for sale 2,240 --
Real estate--Mortgage 6,710 11,993
Real estate--Construction 1,537 7,734
Installment 7,043 9,897
Lease financing 51 129
--------------------------
Subtotal 157,768 167,946
Less unearned income 3 12
--------------------------
Loans and leases, net of unearned income $157,765 $167,934
==========================
</TABLE>
Included in the loan portfolio are loans on which the Company has ceased the
accrual of interest or renegotiated the terms to provide for a reduction or
deferral of interest. At December 31, 1995, and 1994, such loans amounted to
approximately $4,341,000 and $7,614,000, respectively. Interest foregone on
nonaccrual loans in 1995, 1994 and 1993 totaled $1,254,000, $1,609,000 and
$2,214,000, respectively.
Loan Loss Reserve
At December 31, 1995, the Company had classified $1,942,000 of its loans as
impaired with a specific reserve of $349,000 and $2,399,000 of its loans
impaired with no specific loss reserve determined in accordance with SFAS No.
114. The average recorded investment in impaired loans during the year ended
December 31, 1995, was $7,195,000. Once a loan has been identified as impaired,
the Company discontinues recognition of interest income and applies the full
amount of all payments received, whether principal or interest, to the principal
balance of the loan.
31
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the activity in the loan loss reserve:
<TABLE>
<CAPTION>
for the years ended December 31, 1995 1994 1993
- -----------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 8,261 $ 14,313 $ 3,854
Provision charged to expense 410 3,825 16,213
Loans charged off (1) (3,661) (10,439) (6,191)
Recoveries on loans previously charged off 391 562 437
----------------------------------
Balance at end of year $ 5,401 $ 8,261 $14,313
==================================
</TABLE>
(1) $5.0 million of total charge-offs for the year ended December 31, 1994,
were due to the discounted sale of $14.1 million in nonperforming loans.
NOTE 6. PREMISES AND EQUIPMENT
Following is a summary of the premises and equipment accounts at December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
(dollars in thousands)
<S> <C> <C>
Land $ 95 $ --
Buildings & building improvements 456 --
Leasehold improvements 2,077 1,962
Furniture, fixtures and equipment 5,027 4,723
----------------------------
7,655 6,684
Less accumulated depreciation and amortization 5,284 4,767
----------------------------
Premises and equipment, net $2,371 $1,917
============================
</TABLE>
Depreciation and amortization expense related to property and improvements was
$572,000, $739,000 and $948,000 for the years ended December 31, 1995, 1994, and
1993, respectively.
NOTE 7. REAL ESTATE OWNED
At December 31, 1995, and 1994, other assets include approximately $2,702,000
and $2,346,000, respectively, of real estate owned. Additionally, at December
31, 1995, and 1994, other assets include approximately $878,000 of other
foreclosed personalty.
NOTE 8. INTANGIBLE ASSETS and MORTGAGE SERVICING RIGHTS
On November 15, 1990, the Company purchased the rights to service certain loans
held by the RTC for $1,735,000. Amortization for 1994 and 1993 was $40,000 and
$486,000, respectively. The remaining mortgage servicing rights, totaling
$320,000, were written off during 1994 in conjunction with the sale of the
mortgage servicing department, accordingly, no amortization was recorded for
1995.
As a result of the acquisition of Frontier in October 1989, the Company recorded
goodwill representing the difference between the cost of the acquisition and the
fair value of the assets acquired. Goodwill amortization in 1993 includes a
write-off for the balance of goodwill in the amount of $1,167,000 based on the
Company's intent to sell Frontier at or near tangible book value. At December
31, 1995, the Company is no longer actively marketing Frontier.
32
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. TIME CERTIFICATES OF DEPOSIT, OTHER SHORT-TERM BORROWINGS AND
INTEREST EXPENSE
The following summarizes time certificates of deposit outstanding at December
31:
<TABLE>
<CAPTION>
1995 1994
- --------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Time certificates of deposit under $100,000 $63,162 $63,186
Time certificates of deposit, $100,000 and over 27,751 25,333
-------------------------
Total $90,913 $88,519
=========================
</TABLE>
The Company terminated the issuance of commercial paper and retired advances
from the Federal Home Loan Bank in December, 1993. During 1994, the Company made
immaterial borrowings on its FHLB advance line and repaid them promptly. No
borrowings were made on the FHLB advance line during 1995.
Interest expense relating to deposits and other borrowed funds for each of the
three years ended December 31 is as follows:
<TABLE>
<CAPTION>
for the years ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Time certificates of deposit under $100,000 $ 3,044 $ 2,638 $ 3,337
Time certificates of deposit, $100,000 and over 1,270 1,254 2,178
Other deposits 2,043 2,361 2,857
Short-term borrowings -- 6 515
Note payable 4 9 112
----------------------------------------
Total Interest Expense $ 6,361 $ 6,268 $ 8,999
========================================
</TABLE>
NOTE 10. INCOME TAXES
The provision for income taxes (benefit) are as follows for the three years
ended December 31:
<TABLE>
<CAPTION>
for years ended December 31, 1995 1994 1993
- -----------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Current:
Federal $ (604) $(923) $(2,100)
State 40 8 --
-----------------------------------------
$ (564) $(915) $(2,100)
-----------------------------------------
Deferred:
Federal $ (848) $1,202 $(1,352)
State (1,020) (2) 219
----------------------------------------
(1,868) 1,200 (1,133)
----------------------------------------
$(2,432) $285 $(3,233)
========================================
</TABLE>
Deferred income taxes for 1995, 1994 and 1993 reflect the impact of "temporary
differences" between the amount of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and regulations.
33
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Principal items making up the deferred income tax provisions follow.
<TABLE>
<CAPTION>
for the years December 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Financial statement income from leases different
from amounts recognized for tax $ -- $ 18 $ (93)
Depreciation recognized for tax different from amount
recognized for financial statement depreciation 32 86 (162)
Financial statement bad debt deduction different
than tax bad debt deduction 1,422 1,477 (2,488)
Financial statement deferred loan fees and costs
different from amounts recognized for tax (147) (293) 79
Prepaid expense recognized for tax different
from amounts recognized for financial statement
purposes (7) (34) --
Financial statement other real estate owned
deduction different from tax other real estate
owned deduction (11) 78 (629)
State income tax benefit recognized for tax
different from amounts recognized for financial
statement purposes -- (413) (416)
Other items, net (41) 261 (52)
Less: net deferred tax valuation allowance (3,116) 20 2,628
-------------------------------------------
$(1,868) $ 1,200 $(1,133)
===========================================
</TABLE>
The reasons for the difference between income tax benefit and expense and the
amount computed by applying the statutory Federal income tax rate to the loss or
income before income taxes are as follows:
<TABLE>
<CAPTION>
Rate Reconciliation for the years ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Taxes (benefit) at 35% $ 468 $ 8 $(5,362)
Adjustment of prior year tax and other 132 -- --
State income taxes, net of federal tax benefits 35 4 (1,686)
Goodwill and permanent differences -- (6) 771
State income tax limitation on net operating loss 49 259 416
Provision for deferred tax asset valuation allowance (3,116) 20 2,628
----------------------------------
$(2,432) $285 $(3,233)
==================================
</TABLE>
Net deferred tax assets and liabilities reflect the cumulative inventory of
"temporary differences" resulting from the differences of assets and liabilities
for financial reporting purposes and such amounts as measured by tax laws and
regulations which will result in taxable or deductible amounts in future years
when the reported amount of the asset or liability is recovered or settled,
respectively. As of December 31, 1995 the Company's gross deferred assets,
deferred liabilities, and tax asset valuation allowance totaled $2,465,000,
$1,065,000 and $0, respectively as compared to gross deferred assets, deferred
liabilities, and tax asset valuation allowance of $3,916,000, $801,000 and
$3,115,000, respectively, as of December 31, 1994.
34
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, the principal items making up the net deferred income tax
(assets) and liabilities are as follows:
<TABLE>
<CAPTION>
as of December 31, 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Depreciation recognized for tax different from amount
recognized for financial statement depreciation $ 457 $ 434
Financial statement bad debt deduction different than
tax bad debt deduction (1,350) (2,276)
Financial statement deferred loan fees and costs different
from amounts recognized for tax 178 294
Prepaid expense recognized for tax different from amounts
recognized for financial statement purposes 64 73
Financial statement other real estate owned deduction
difference from tax other real estate owned deduction (63) (136)
Financial statement occupancy expense deduction difference
from tax occupancy expense deduction (385) (390)
State income tax benefit recognized for tax different from
amounts recognized for financial statement purposes (242) (393)
Other items, net 3 (254)
Unrealized loss on available-for-sale securities (62) (467)
Less: net deferred tax valuation allowance -- 3,115
----------------------------
Net deferred tax asset $(1,400) $ 0
============================
</TABLE>
The net deferred tax assets at December 31, 1995, is included in other assets in
the consolidated balance sheets.
NOTE 11. COMMON STOCK AND STOCK OPTIONS
Under a stock option plan approved by the Board of Directors in 1982, options
have been granted to key personnel for a term of ten years exerciseable at 25%
annually at the fair market value at the date of grant. During 1991, the
Company's Board of Directors adopted the Ventura County National Bancorp 1991
Stock Option Plan (1991 Plan). The 1991 Plan provides that incentive stock
options be granted to full-time salaried officers and management level employees
of the Company or its subsidiaries for a term of 10 years exerciseable at 20%
annually at the fair market value at the date of the grant. The 1991 Plan also
provides that nonqualified stock options be granted to directors, key full-time
salaried officers and management level employees of the Company or its
subsidiaries for a term of 10 years, exerciseable at 25% annually at the fair
market value at the date of grant.
The following table sets forth activity under the 1982 option plan for the years
ended December 31,
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
(Number of shares) 1995 1994 1993
----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 21,813 46,741 49,648
Options granted - - -
Options exercised - - -
Options expired (21,813) (24,928) (2,907)
----------------------------------------------------------------------------
Balance, December 31 - 21,813 46,741
============================================================================
Shares exercisable - 4,362 46,741
Exercise price N/A $4.81 $3.61 to $4.81
</TABLE>
35
<PAGE>
The following table sets forth activity under the 1991 option plan for the years
ended December 31,
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
(Number of shares) 1995 1994 1993
----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 171,588 167,418 136,730
Options granted 93,228 25,000 104,888
Options exercised (4,000) - -
Options expired or cancelled (20,500) (20,830) (74,200)
----------------------------------------------------------------------------
Balance, December 31 240,316 171,588 167,418
============================================================================
Options exercisable 111,597 69,955 37,576
Exercise price $1.51 to $6.84 $2.13 to $6.84 $2.13 to $6.84
</TABLE>
In October 1989, the Company established an Employee Stock Ownership Plan
("ESOP"), for which all full-time employees who have completed one year of
service at the Plan year end and all part-time employees who work at least 1,000
hours per year and have completed one year of service at the Plan year end are
eligible. The ESOP was funded by a $4,000,000 loan to the Company from an
independent third party. These debt proceeds were lent to the ESOP which used
the proceeds to acquire 444,444 newly issued shares of the Company's common
stock. The Company raised $1,555,000 from a private placement of 719,580 shares
of common stock and issued $125,000 in notes payable during 1993 and used the
proceeds to retire the remaining principal on the ESOP note payable to a third
party. During 1995, there were 185,840 shares allocated to eligible plan
participants.
Effective January 1, 1994, the Company adopted the provisions of Statement of
Position 93-6, "Employers Accounting for Employee Stock Ownership Plans." This
SOP requires the Company to record compensation expense upon release of shares
to employees at the current fair value of shares released. Prior to adoption of
SOP 93-6, the Company recorded compensation expense for allocated shares based
on the historical cost of $9.00 per share. The adoption of SOP 93-6 had no
effect on the reported results of operations of the Company in 1994, as the
Company made no contributions to the Plan in 1994 and no shares were released to
participants.
The Company contributed $547,000 during 1995, and settled all required
contributions between the Company and the ESOP. As a result, the Trustee of the
ESOP paid off the loan to the Company and all of the shares previously held in
the suspense account, which totalled 185,840 shares as of December 31, 1994,
were released to the eligible plan participants.
During 1995, 1994 and 1993, the Company incurred $547,000, $nil and $635,000 of
compensation expense and $nil, $nil and $112,000 of interest expense,
respectively, related to the ESOP and note payable.
NOTE 12. 401(K) PLAN
The Company established a 401(k) plan on October 1, 1987, for which all
full-time employees who have completed 90 consecutive days of service, and all
part-time employees who work at least 1,000 hours per year and have completed 90
consecutive days of service are eligible for enrollment. Employees may
contribute a percentage of their salary pursuant to IRS regulatory maximums, and
under the plan, the Company has a discretionary matching provision. For the
years ended December 31, 1995, and 1994, the Company contributed $48,000 and
$49,000, respectively, to the 401(k) plan and reported such as salaries and
benefits expense.
NOTE 13. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1995. Considerable judgment is
necessarily required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
that date and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
36
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following disclosure of estimated fair value of financial instruments is
made in accordance with SFAS No. 107. The estimates have been determined by the
Company using available market information and appropriate valuation
methodologies. The estimated fair values of the Company's financial instruments
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 19,920 $ 19,920 $ 11,442 $ 11,442
Federal funds sold 47,450 47,450 27,000 27,000
Interest bearing deposits with other
financial institutions 100 100 694 694
Investment securities 36,588 36,588 50,634 49,822
Net loans and leases 148,023 147,386 159,673 148,692
Liabilities:
Demand deposits and savings 145,159 145,159 147,823 147,823
Time deposits 90,913 91,378 88,519 88,366
Other borrowings 0 0 125 125
Off-balance-sheet instruments (unrealized gains (losses)):
Commitments to extend credit 0 0 0 0
Standby letters of credit 0 0 0 0
</TABLE>
Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Cash Equivalents
For cash and cash equivalents, the carrying amount is a reasonable
estimate of fair value.
Interest Bearing Deposits with Other Financial Institutions
The fair value of fixed-maturity certificates of deposit is estimated
by discounting the future cash flows using the current market rates
for deposits with similar remaining maturities.
Investment Securities
For securities held as investments, fair value equals quoted market
prices. Estimated fair value for mortgage-backed securities issued by
governmental agencies is based on quoted market prices.
Net Loans and Leases
The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities. During the second quarter of 1994, $14.1 million in
nonperforming loans were sold in a bulk sale at 67% of book value. As
such, management utilized this valuation factor in placing a fair
value on non-performing loans of $7,945,000 at December 31, 1994. It
was not practicable to reasonably assess the credit adjustment that
would be applied in the marketplace for nonperforming loans at
December 31, 1995. Therefore, nonperforming loans of $4,341,000 are
excluded from the carrying amount and fair value balances at December
31, 1995. Interest rates on such loans ranged from 8.5% - 11.75%,
maturities ranged from 0 to 20 years, and approximately 85% were real
estate secured.
Demand Deposits, Savings and Time Deposits
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date.
The fair value of fixed-maturity certificates of
37
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
deposit is estimated by discounting the future cash flows using the
rates currently offered for deposits of similar remaining maturities.
Other Borrowings and Notes Payable
Rates currently available to the Company for debt with similar terms
and remaining maturities are used to estimate fair value of existing
debt. At December 31, 1994, the differential between the note
payable's carrying value and its discounted value was insignificant.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present credit-worthiness of
the counter-parties. The fair value of letters of credit is based on
fees currently charged for similar agreements or on the estimated cost
to terminate them or otherwise settle the obligations with the
counter-parties at the reporting date. Current rates have increased
since the commitments were made, yet the fee applied to the balance of
commitments outstanding resulted in values which are insignificant for
1995 and 1994.
NOTE 14. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance Sheet Risk
The Company is a party to certain financial instruments in the normal course of
business with a degree of off-balance sheet risk. These instruments include
commitments to extend credit, standby, and commercial letters of credit, which
are designed to meet the needs of the banks' customers.
Commitments to extend credit and standby and commercial letters of credit are
evaluated on a case-by-case basis dependent on each customer's
credit-worthiness. The Company has a rating process which is applied to each
customer. The resulting rating establishes varying levels of required credit
approvals and limits of lending. Monitoring procedures include, but are not
limited to, monthly review of customer accounts by a management committee. The
agreements with the customers normally require collateral and provide
restrictive covenants under generally the same conditions as other lending
activities of the Company. Such collateral varies but may include accounts
receivable, inventories, property and equipment, and real property. The policy
of the Company is to limit lending to 75% of the market value of the collateral.
The Company's exposure to credit loss in the event of non-performance by the
party related to these instruments is represented by the contractual amount of
these instruments in the case of commitments to extend credit. As of December
31, 1995, the Company did not have commitments to borrowers that have additional
borrowings which have been classified as nonperforming loans and/or as potential
problem loans.
The Company conducts business primarily in Southern California and the ability
of the Company's customers to honor their loan agreements is dependent on the
economic health of this service area. Although the Company generally provides
loans and financial instruments to a broad variety of industries and customers,
at December 31, 1995, approximately $49.3 million represented loans, commitments
and letters of credit to individuals and companies in the real estate industry.
Further, a substantial portion of the collateral for commercial, financial and
agricultural loans is real estate.
Commitments to Extend Credit
Commitments to extend credit represent agreements to lend, on demand and subject
to the restrictive covenants, monies to a customer up to a designated limit. The
commitments generally have fixed expiration dates, variable interest rates, and
normally require payment of an annual fee. Since many of the commitments
historically expire without being fully drawn upon and are subject to regular
monitoring and certain restrictions, the total commitment amounts outstanding do
not necessarily represent future cash requirements. Fees collected for credit
commitments and standby letters of credit, are generally deferred and amortized
over the commitment term on a straight-line basis. The total amount of
commitments to extend credit at December 31, 1995 was $36,304,000, compared with
$30,880,000 at December 31, 1994.
38
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Standby and Commercial Letters of Credit
Standby and commercial letters of credit are conditional commitments issued by
the Company to guarantee the performance of their customers to a third party.
Such letters of credit are normally issued to support performance bonds and
private borrowing arrangements, which include guarantees to suppliers outside of
the United States. Standby and commercial letters of credit amounting to
$2,498,000 were outstanding at December 31, 1995, all of which are expected to
expire by December 31, 1996. Standby and commercial letters of credit amounted
to $2,898,000 as of December 31, 1994, all of which expired by December 31,
1995.
Lease Commitments
The Company leases office premises and certain equipment under operating leases
which expire at various dates through 2006. Total rental expense, net of
sublease income, for all non-cancelable operating leases amounted to
approximately $1,259,000, $1,528,000 and $1,682,000 for the three years ended
December 31, 1995, 1994 and 1993, respectively. Future minimum commitments under
these leases of premises and equipment as of December 31, 1995, net of sublease
income and including estimated CPI increases, are as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
1996....................................... $ 1,170
1997....................................... 1,091
1998....................................... 1,161
1999....................................... 1,202
2000....................................... 1,115
Thereafter................................. 4,324
</TABLE>
Litigation
In the normal course of business, the Company is subject to various legal
actions. It is the opinion of management, based upon the opinion of legal
counsel, that such litigation will not have a material impact on the financial
position or results of operations of the Company.
NOTE 15. RELATED PARTY TRANSACTIONS
The Company and its subsidiaries have granted loans to certain officers and
directors of the Company, and to businesses with which they are associated, in
the ordinary course of business. These loans are made under terms which are
consistent with the Company's normal lending policies. The amounts of these
loans were approximately $6,291,000 and $7,730,000 at December 31, 1995 and
1994, respectively. During 1995, new loans totaling $528,000 were made, and net
repayments of approximately $1,914,000 were received. During 1994, new loans
totaling $4,608,000 were made, and net repayments of approximately $9,653,000
were received. Interest and fees earned on these loans approximated $548,000,
$762,000 and $1,111,000 in 1995, 1994 and 1993, respectively.
NOTE 16. RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS, OR ADVANCES
Certain restrictions exist regarding the ability of the subsidiaries to transfer
funds to the Company in the form of cash dividends, loans or advances. See Note
17 for discussion regarding restrictions placed on Frontier per the Consent
Order. Generally, the approval of the Comptroller of the Currency is required to
pay dividends in excess of earnings retained in the current year plus retained
net profits for the two preceding years. Also, under Federal Reserve regulation,
a bank subsidiary is limited in the amount it may loan to affiliates, including
the Company, unless such loans are collateralized by specific obligations.
At December 31, 1995 and 1994, the Company had no loans to affiliates.
NOTE 17. CAPITAL RESOURCES AND REGULATORY MATTERS
The Company is required by federal regulation to meet certain capital standards.
The risk-based capital standards require a minimum total capital of 8.0% of
"risk-adjusted assets," as defined by the standard. At least half of the
required capital must contain Tier 1 capital, which consists primarily of common
stock and retained earnings, less goodwill. Additionally, the capital standards
require the Company to maintain a minimum leverage ratio of Tier 1
39
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
capital to average assets and a Tier 1 capital to risk-weighted assets ratio of
at least 4%. As of December 31, 1995, and 1994, the Company was in compliance
with the requirements.
The following table sets for the capital ratios for the Company as of December
31, 1995, and 1994:
<TABLE>
<CAPTION>
-----------------------------------------------------
December 31, 1995 1994
-----------------------------------------------------
<S> <C> <C>
Leverage capital ratio 11.40% 7.53%
Tier 1 risk-based capital ratio 17.56% 11.32%
Risk-based capital ratio 18.83% 12.61%
</TABLE>
Regulatory Matters
At periodic intervals, both the Office of the Comptroller of the Currency and
the FDIC routinely examine the bank subsidiaries' financial statements as part
of their legally prescribed oversight of the banking industry. Based on these
examinations, the regulators can direct that the Company's financial statements
be adjusted in accordance with their findings. Ventura entered into a Formal
Agreement ("Formal Agreement") with the OCC on March 19, 1993 while Frontier
entered into a Consent Order ("Consent Order") with the OCC on March 29, 1993.
Based upon an examination of Ventura completed during the fourth quarter of
1995, the OCC terminated Ventura's Formal Agreement as of November 30, 1995.
The significant requirements of the Consent Order include conducting a program
to evaluate and improve board supervision and management, developing a program
designed to improve lending staff and loan administration, obtaining current
credit information on any loans lacking such information, reviewing and revising
loan policy, establishing an independent loan review program, developing and
implementing a program to collect or strengthen criticized assets, reviewing and
maintaining an adequate loan loss reserve, developing a new long range strategic
plan and annual budget, developing a three-year capital plan, developing and
revising liquidity and funds management policy, correcting violations of law
cited by the OCC and obtaining approval from the OCC to declare or pay a
dividend. In addition, the Consent Order requires that Frontier appoint a full-
time President and Chief Executive Officer, maintain, as of May 31, 1993 and
beyond, a Tier 1 capital ratio of 9.50% and a leverage ratio of 7.00% and to
continue to develop a program of asset diversification. Kathleen L. Kellogg
became President and Chief Executive Officer at Frontier in November 1994. At
December 31, 1995, Frontier's Tier 1 capital and leverage ratios were 13.78% and
9.75%, respectively.
The Company entered into a Memorandum of Understanding ("MOU") with the Federal
Reserve Bank of San Francisco (the "Reserve Bank") acting under delegated
authority from the Federal Reserve Board on March 19, 1994. The significant
requirements of the MOU include submitting a program to improve the financial
condition of the Banks, evaluate and improve board supervision and management,
exit the commercial paper market, comply with Federal Reserve Board policy
regarding management or service fees assessed by the Company and paid by the
Banks and implement steps to improve the effectiveness of the audit and credit
review functions. The MOU further restricts the Company from declaring or paying
a dividend, incurring any debt, adding or replacing a director or senior
executive or repurchasing Company stock without notice to and nondisapproval of
the Reserve Bank. The MOU also requires the Company's Board of Directors to
establish a committee to monitor compliance with the MOU and ensure that
quarterly written progress reports detailing the form and manner of all actions
taken to attain compliance with the MOU are submitted.
Management believes Frontier and the Company are in full compliance with all of
the items required under the Consent Order and MOU, respectively.
40
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. PARENT COMPANY ONLY, FINANCIAL INFORMATION
The following financial information represents the balance sheets of Ventura
County National Bancorp (Parent Company only) as of December 31, 1995, and 1994,
and the related statements of operations and cash flows for the periods
indicated:
<TABLE>
<CAPTION>
BALANCE SHEETS
(Dollars in thousands) December 31,
- ---------------------------------------------------------------------------------------------------------------------
Assets: 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 243 $ 37
Federal funds sold 3,250 -
Equity in Bank subsidiaries 25,520 19,143
Other assets 608 -
- ---------------------------------------------------------------------------------------------------------------------
Total Assets $ 29,621 $ 19,180
=====================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- ---------------------------------------------------------------------------------------------------------------------
Note payable $ - $ 125
Other liabilities 162 3
- ---------------------------------------------------------------------------------------------------------------------
Total Liabilities 162 128
- ---------------------------------------------------------------------------------------------------------------------
Shareholders' equity 29,459 19,052
- ---------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 29,621 $ 19,180
=====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
(Dollars in thousands) Years ended December 31,
- ---------------------------------------------------------------------------------------------------------------------
Income: 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest $ 76 $ - $ 193
Management fees 1,003 1,067 1,729
Other 2 - -
- ---------------------------------------------------------------------------------------------------------------------
1,081 1,067 1,922
- ---------------------------------------------------------------------------------------------------------------------
Expenses:
- ---------------------------------------------------------------------------------------------------------------------
Interest 4 9 199
Salaries and benefits 1,048 1,059 1,249
Miscellaneous operating 118 62 718
Commercial paper reimbursement 3,306 - -
- ---------------------------------------------------------------------------------------------------------------------
4,476 1,130 2,166
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and equity in undistributed
income (losses) of subsidiary (3,395) (63) (244)
Provision for income taxes (benefit) allocated (1,349) (2) -
Equity in undistributed net earnings (deficit) of Bank subsidiaries 5,814 (201) (11,843)
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 3,768 $ (262) $ (12,087)
=====================================================================================================================
</TABLE>
41
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
(Dollars in thousands) Years ended December 31,
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities: 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ 3,768 $ (262) $ (12,087)
Adjustments to reconcile net income (loss) to net cash
provided by (applied to) operating activities
(Earnings) deficit from Bank subsidiaries (5,814) 201 11,843
Amortization - - 231
Change in other assets (608) 39 2
Change in other liabilities 159 (31) 24
Deferred compensation related to ESOP 547 - 635
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (applied to) operating activities (1,948) (53) 648
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital contribution to subsidiary - - (150)
Change in interest-bearing deposits due from banks - - 8,875
Change in Federal funds sold (3,250) - -
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (applied to) investing activities (3,250) - 8,725
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Change in short-term borrowings - - (8,860)
Repayment of note payable (125) - (2,188)
Issuance of note payable - - 125
Issuance of stock 5,529 - 1,430
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 5,404 - (9,493)
- ---------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash 206 (53) (120)
Cash and cash equivalents at beginning of year 37 90 210
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 243 $ 37 $ 90
=====================================================================================================================
Supplemental information:
Cash paid during the year for interest $ 4 $ 9 $ 199
Cash paid during the year for income taxes $ 3 $ 3 $ 300
</TABLE>
42
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. QUARTERLY INFORMATION, 1995 AND 1994
The following table sets forth the Company's unaudited results of operations for
each of the quarters of 1995 and 1994. This information, in the opinion of
management, includes all adjustments necessary to state fairly the information
set forth herein. The operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
(Unaudited, dollars in thousands, except per share data) 1995 Quarter Ended
- ---------------------------------------------------------------------------------------------------------------------
31-Dec 30-Sep 30-Jun 31-Mar
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 5,206 $ 5,254 $ 5,150 $ 5,188
Interest expense 1,628 1,617 1,571 1,545
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 3,578 3,637 3,579 3,643
- ---------------------------------------------------------------------------------------------------------------------
Provision for possible loan losses - (100) 155 355
Noninterest income 582 624 434 606
Noninterest expense 4,301 3,681 3,334 3,621
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (141) 680 524 273
- ---------------------------------------------------------------------------------------------------------------------
Provision for income taxes (benefit) (2,462) 30 - -
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 2,321 $ 650 $ 524 $ 273
=====================================================================================================================
Net income per share $ 0.30 $ 0.08 $ 0.07 $ 0.03
=====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
(Unaudited, dollars in thousands, except per share data) 1994 Quarter Ended
- ---------------------------------------------------------------------------------------------------------------------
31-Dec 30-Sep 30-Jun 31-Mar
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 5,641 $ 5,511 $ 5,593 $ 5,391
Interest expense 1,555 1,503 1,549 1,661
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 4,086 4,008 4,044 3,730
- ---------------------------------------------------------------------------------------------------------------------
Provision for loan losses 550 400 2,075 800
Noninterest income 374 591 1,956 1,143
Noninterest expense 3,864 3,559 4,474 4,187
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 46 640 (549) (114)
- ---------------------------------------------------------------------------------------------------------------------
Provision for income taxes (benefit) (4) 75 214 -
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 50 $ 565 $ (763) $ (114)
=====================================================================================================================
$ 0.01 $ 0.09 $ (0.12) $ (0.02)
=====================================================================================================================
</TABLE>
43
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Ventura County National Bancorp:
We have audited the accompanying consolidated balance sheets of Ventura County
National Bancorp and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Ventura County National Bancorp and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
February 9, 1996
Los Angeles, California
44
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement on
Form S-8 of Ventura County National Bancorp of our report dated February 9, 1996
appearing in the Annual Report on Form 10-K for the year ended December 31,
1995.
DELOITTE & TOUCHE LLP
March 27, 1996
Los Angeles, California
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 19,920
<INT-BEARING-DEPOSITS> 100
<FED-FUNDS-SOLD> 47,450
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 36,558
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 157,765
<ALLOWANCE> 5,401
<TOTAL-ASSETS> 267,756
<DEPOSITS> 236,072
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,225
<LONG-TERM> 0
0
0
<COMMON> 37,025
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 267,756
<INTEREST-LOAN> 16,375
<INTEREST-INVEST> 2,586
<INTEREST-OTHER> 1,837
<INTEREST-TOTAL> 20,798
<INTEREST-DEPOSIT> 6,357
<INTEREST-EXPENSE> 6,361
<INTEREST-INCOME-NET> 14,437
<LOAN-LOSSES> 410
<SECURITIES-GAINS> 47
<EXPENSE-OTHER> 14,937
<INCOME-PRETAX> 1,336
<INCOME-PRE-EXTRAORDINARY> 1,336
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,768
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.48
<YIELD-ACTUAL> 6.15
<LOANS-NON> 4,341
<LOANS-PAST> 101
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 9,300
<ALLOWANCE-OPEN> 8,261
<CHARGE-OFFS> 3,661
<RECOVERIES> 391
<ALLOWANCE-CLOSE> 5,401
<ALLOWANCE-DOMESTIC> 5,401
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
